<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 4, 1998
REGISTRATION NO. 333-64619
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
ARTIFICIAL LIFE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7372 04-3253298
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
FOUR COPLEY PLACE, SUITE 102
BOSTON, MASSACHUSETTS 02116
(617) 266-5542
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
EBERHARD SCHONEBURG
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ARTIFICIAL LIFE, INC.
FOUR COPLEY PLACE, SUITE 102
BOSTON, MASSACHUSETTS 02116
(617) 266-5542
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
ROBERT DUGGAN, ESQ. PAUL BERKOWITZ, ESQ.
PETER S. LAWRENCE, ESQ. LISA CARSTARPHEN, ESQ.
MINTZ, LEVIN, COHN, FERRIS, GLOVSKY AND POPEO, P.C. GREENBERG TRAURIG, P.A.
ONE FINANCIAL CENTER 1221 BRICKELL AVENUE
BOSTON, MASSACHUSETTS 02111 MIAMI, FLORIDA 33131
(617) 542-6000 (305) 579-0500
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED REGISTERED SHARE(3) PRICE(3)
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<S> <C> <C> <C>
Common Stock, $.01 par value per share... 2,004,800(1)(2) $7.00 $14,033,600
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Warrant to be issued to the Representatives of the
Underwriters upon consummation of the
Offering................ 1 N/A $100
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Common Stock, $.01 par value per share(4)... 184,000 $8.40 $1,545,600
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Total..................... N/A N/A N/A
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<CAPTION>
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AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED REGISTRATION FEE
- -------------------------------------------------- -------------------
<S> <C>
Common Stock, $.01 par value per share... $4,139.91
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Warrant to be issued to the Representatives of the
Underwriters upon consummation of the
Offering................ $.03
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Common Stock, $.01 par value per share(4)... $455.95
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Total..................... $4,596(5)
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</TABLE>
(1) Includes 240,000 shares that the Underwriters may purchase to cover
over-allotments, if any.
(2) Includes 164,800 shares of Common Stock registered on behalf of the
Registering Stockholders.
(3) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933.
(4) Represents total number of shares of Common Stock issuable upon exercise of
the Warrant to be issued to the Representatives of the Underwriters.
Pursuant to Rule 416, this Registration Statement also covers such
additional number of shares of Common Stock as may be issuable pursuant to
the antidilution provisions of the Warrant.
(5) The Registrant has previously paid $4,256 of this filing fee with the filing
of this Registration Statement on September 29, 1998.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED NOVEMBER , 1998
PROSPECTUS
1,600,000 SHARES
[ARTIFICIAL LIFE LOGO]
ARTIFICIAL LIFE, INC.
COMMON STOCK
Of the 1,600,000 shares of Common Stock offered hereby, 1,200,000 shares are
being sold by Artificial Life, Inc. ("Artificial Life" or the "Company") and
400,000 shares are being sold by the Selling Stockholder. See "Principal,
Selling and Registering Stockholders." The Company will not receive any of the
proceeds from the sale of shares by the Selling Stockholder.
Prior to this Offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering price
will be between $6.00 and $7.00 per share. See "Underwriting" for a discussion
of the factors to be considered in determining the initial public offering
price.
The Company has applied for listing of the Common Stock on the Nasdaq
SmallCap Market under the symbol "ALIF."
An additional 164,800 shares of Common Stock are being registered herewith
on behalf of certain stockholders of the Company (the "Registering
Stockholders"). This is the maximum number of shares that the Company is
obligated to register pursuant to the Company's agreement to register 20% of the
824,000 shares of Common Stock held in the aggregate by the Registering
Stockholders. These shares are subject to a lock-up agreement with New York
Broker, Inc. and may not be sold, without the consent of New York Broker, Inc.,
until 180 days after the date of this Prospectus. See "Principal, Selling and
Registering Stockholders" and "Underwriting." The Company will not receive any
proceeds from the sale of shares by the Registering Stockholders. The Company is
paying all costs incurred in the registration of the shares of Common Stock
being registered on behalf of the Registering Stockholders but is paying only a
portion of the costs incurred in the registration of the shares to be sold by
the Selling Stockholder.
------------------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 7.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDER
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<S> <C> <C> <C> <C>
Per Share............................... $ $ $ $
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Total(3)................................ $ $ $ $
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</TABLE>
(1) Does not include additional compensation to New York Broker, Inc. and New
York Broker Deutschland AG (the "Representatives") of (a) a non-accountable
expense allowance equal to 3% of the gross proceeds of the Offering and (b)
a warrant entitling the Representatives to purchase up to 160,000 shares of
Common Stock (the "Representatives' Warrant") for a period of four years
commencing one year from the date of this Prospectus at 120% of the initial
public offering price. In addition, the Company and the Selling Stockholder
have agreed to indemnify the Underwriter against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated at $1,027,500.
The balance of the expenses, estimated at $172,500, will be paid by the
Selling Stockholder.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 240,000 additional shares of Common Stock solely to cover
over-allotments, if any. To the extent the option is exercised, the
Underwriters will offer the shares at the Price to Public shown above. If
all such shares are purchased, the total Price to Public, Underwriting
Discounts and Commissions, and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters subject
to prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1998, at the office of New York Broker,
Inc. in Fairfax, Virginia.
NEW YORK BROKER, INC. NEW YORK BROKER DEUTSCHLAND AG
(International Manager)
The date of this Prospectus is , 1998
<PAGE> 3
OUTSIDE GATE
[Color work: The Company name Artificial Life, Inc. appears on top center of the
page, directly above a caption that reads "We give the Web a pulse!" The caption
is underscored with a pulse line.] [The face of an avatar showing its brain
appears on the left side of the page. A wire grid portion of the face merges
with a globe of the earth.]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF
THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET INCLUDING OVER-ALLOTMENT, STABILIZING AND
SHORT-COVERING TRANSACTIONS AND THE IMPOSITION OF PENALTY BIDS. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ SMALLCAP MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. SEE "UNDERWRITING."
The Company claims a trademark on Artificial Life(TM), ALife(TM),
ALife-WebGuide(TM), ALife-SalesRep(TM), ALife-Messenger(TM),
ALife-Portfolio-Manager(TM), ALife-Call-Center-Agent(TM),
ALife-Knowledge-Manager(TM), ALife-Personal-Tutor(TM), ALife-SmartEngine(TM),
SmartEngine(TM), SmartBot(TM), and the Company's logo. All other trade names,
trademarks or servicemarks appearing in this prospectus are the property of
their respective owners and are not the property of the Company.
2
<PAGE> 4
INSIDE GATEFOLD
[Color work: Artificial Life SmartBots[TM] name appears vertically on
the left edge of the gatefold.] [On the left side of the page, the
following goals and/or applications of the SmartBots[TM] are stated: Improve
Web Navigation, Personalize the Web with SmartBots[TM], Direct Marketing and
Enable E-Commerce. Integrated with the goals is a graphic of an avatar's face
with personalized features, a wire grid hand pressing a doorbell and a computer
where a wire grid hand is protruding from the screen holding a credit card.]
[To the center right of the gatefold is a circular diagram depicting that the
Company's planned products (which have not yet been released for commercial
sale) are based on a central core technology, the Alife Smart Engine[TM]. The
center of the circular diagram delineates a wire grid face emerging into a full
face.] [Beginning with the left side of the circular diagram, caption reads
"Alife SmartEngine[TM] is the core component that gives SmartBots[TM] the
ability to converse with users in natural language. The SmartEngine[TM] stores
information in "knowledge bases" that can be exchanged to provide bots with
different sets of expertise." Moving in a clockwise direction, each of the
Company's planned products is depicted by an illustrated representation and a
caption. The graphics of the first planned product Alife-SalesRep[TM] depicts
an avatar discussing the features of an automobile. The graphics of the second
planned product Alife-Personal-Tutor[TM] depicts an avatar teaching the German
language. The graphics of the third planned product
Alife-Call-Center-Agent[TM] portrays an avatar receptionist.] [On the right
side of the circular diagram is a graphic of the WebGuide[TM] 1.0 Professional
product representative] [Continuing in a clockwise direction, the graphics of
the fourth planned product Alife-Portfolio-Manager[TM] depicts an avatar on the
telephone with a ticker tape background. The graphics of the fifth planned
product Alife-Knowledge-Manager[TM] portrays an avatar in an electronic
library. The graphics of the sixth planned product Alife-Messenger[TM]
illustrates a telephone, a pager, a palm-pilot and an avatar.] [Each page of
the inside gatefold has the following disclosure: "THE COMPANY HAS NOT
RELEASED ANY OF ITS PRODUCTS FOR COMMERCIAL SALE. THE COMPANY EXPECTS TO
RELEASE ITS PRODUCTS FOR COMMERCIAL SALE LATER IN 1998, 1999, AND 2000. THERE
CAN BE NO ASSURANCE THAT THE COMPANY WILL SUCCEED IN COMMERCIALIZING ITS
PLANNED PRODUCTS."]
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the Financial Statements,
including the Notes thereto, appearing elsewhere in this Prospectus. Except as
otherwise noted herein, all information in this Prospectus (i) reflects the
adoption of the Amended and Restated Certificate of Incorporation of the Company
(the "Certificate of Incorporation"), to be effected upon consummation of the
Offering, removing the Company's existing class of Non-Voting Common Stock,
increasing the authorized Common Stock to 30,000,000 shares and creating and
authorizing 5,000,000 shares of undesignated Preferred Stock, (ii) reflects the
amendment of the Company's Bylaws effective upon consummation of the Offering,
(iii) reflects a 1-for-2.44 reverse stock split of the Common Stock of the
Company effected on September 22, 1998, and (iv) assumes no exercise of the
Underwriters' over-allotment option.
THE COMPANY
Artificial Life, Inc. ("Artificial Life" or the "Company") develops,
markets and supports "intelligent" software robots ("bots"). The Company's bots,
known as "SmartBots," are software programs that the Company is developing to
automate and simplify time-consuming and complex business-related Internet
functions such as Web navigation, direct marketing, user profiling, information
gathering, messaging, knowledge management, sales response and call center
automation. The Company is also developing applications in data mining, Web-page
analysis, statistical analysis and direct marketing to support the functionality
of the SmartBot products. While each Artificial Life SmartBot will function
independently and will be programmed for a particular application, customers
will be able to combine the SmartBots to create what the Company believes will
be the industry's first integrated commercial, robot-based electronic commerce
("e-commerce") solution. In addition, the Company provides software consulting
services to corporations and other entities seeking software solutions,
particularly in the field of "intelligent" software programs.
The rapidly increasing number of Web users and ubiquitous access to the
Internet, both in the United States and internationally, have resulted in the
emergence of the Internet as a new mass medium through which persons and
entities gather information, communicate, market and sell products and services,
interact and seek entertainment. However, the Company believes that the
Internet's success has also made it increasingly difficult for Internet users to
search for and locate information relevant to their interests and for companies
engaged in selling goods and services over the Internet to effectively market
and support their products and services. Artificial Life is developing its
family of SmartBot products to help address these needs.
The Company's SmartBot products are being designed to communicate in
natural language and to respond "intelligently" to a user's command or inquiry,
and in some cases, to act autonomously. All of the Company's SmartBot products
are based on the Company's Alife-SmartEngine technology. The Alife-SmartEngine
is the core component that gives the Company's products the ability to converse
with its users in natural language, either by text or speech, and also to
process and respond to natural language commands or questions. The Company
believes that its products will allow people to interact with computers in a
more natural way -- similar to a conversation with a human being.
The Company believes that "intelligent" software products represent an
emerging standard in the way individuals and businesses will retrieve, present
and manipulate information on the Internet. The advent of graphical user
interfaces and window-based operating systems created a new personal computing
standard and led to significantly increased computer use because they made
computers easier to use. Users no longer had to engage in the time consuming
task of learning and accurately executing textual operating commands. Instead, a
generation of computer users operated their computers by pointing and clicking
with a "mouse." The Company believes that the introduction and adoption of
"intelligent" software programs like its SmartBots will make the Internet easier
to use through natural language communication and by freeing users from much of
the time
3
<PAGE> 6
needed to manually search for data on the Internet and then to manipulate such
data for the user's desired purpose.
The Company released its first SmartBot product, the non-commercial version
of the Alife-WebGuide, in September 1998. To date, the Company has not sold any
SmartBot products but expects to commence sale of the "Professional" version of
the Alife-WebGuide in the fourth quarter of 1998 and the "Enterprise" version in
the first quarter of 1999. The Company is presently developing the initial
versions of seven SmartBot products listed below:
- ALIFE-WEBGUIDE: This SmartBot is designed to reside on a Web site and
help users navigate the site by accepting and processing questions, such
as search queries, from users in natural language, and responding to
users in natural language. The bot engages the user in a "conversation"
through questions and answers and, upon learning of the user's interests,
is designed to display Web pages that match the content of the
"conversation" or to suggest links to other locations on the Web site.
- ALIFE-SALESREP: The Alife-SalesRep is being designed for e-commerce
retailers to use for one-to-one marketing on the Internet. Retailers will
input user profile information and product information into this
SmartBot's Knowledge Bases to deliver customer-specific, targeted sales
information via the Internet.
- ALIFE-MESSENGER: The Alife-Messenger is being designed to act as a
natural language-based automated e-mail reply and answering service. By
customizing the Alife-Messenger, a company can automate replies to
incoming e-mail queries and customer requests, thereby reducing the need
for human intermediaries.
- ALIFE-PORTFOLIO-MANAGER: This SmartBot is being developed to monitor, in
real-time, an individual's investment portfolio using criteria
established by the individual and, when such criteria have been met, or
failed to have been met, to autonomously in real-time contact the
individual by telephone, pager, e-mail or some other mode of
communication and let the individual know that trading action might be
warranted.
- ALIFE-CALL-CENTER-AGENT: The Alife-Call-Center-Agent is being designed
for call centers and help desks to be integrated with existing call
center server software to provide an automated first response to incoming
voice telephone calls or e-mail requests and to handle call center
requirements with virtually no aid from human operators.
- ALIFE-KNOWLEDGE-MANAGER: This SmartBot is being designed to extract
information contained in a company's Intranet documents, organize it and
make it more easily accessible for retrieval in order to enable companies
to more efficiently and intelligently manage the large amount of data and
documents that companies are making available on their Intranets.
- ALIFE-PERSONAL-TUTOR: The Alife-Personal-Tutor is a tutoring program
being designed to extract profile information from natural language
conversation between the bot and the student user and to automatically
adapt the difficulty and content of the lessons to the skill level of the
student based on this information.
The Company plans to offer a fully-functional "Personal" version of most of
its products to non-commercial users either free or at a low price. The Company
believes that this approach, which has been used successfully by other Internet
companies, will result in more rapid acceptance and sales of the Company's
products to commercial users. The commercial versions of the SmartBot products
will include a "Professional" version for professional and small corporate users
and/or a transaction and client/server based "Enterprise" version for networked
corporate users. For the commercial versions of its SmartBot products, the
Company intends to charge a one-time licensing fee and, with respect to the
"Enterprise" version, intends to also charge a transactional fee based upon the
number of users which interact with its bots. The Company develops its SmartBot
products on widely available standard hardware and software platforms such as
Windows NT/95/98 and
4
<PAGE> 7
Internet browsers such as the Netscape Navigator/Communicator and Microsoft
Internet Explorer. The Company also expects to offer some of the products for
Unix and Macintosh computers in the future. The Company intends to release the
commercial versions of the Alife-WebGuide in the fourth quarter of 1998 and a
number of its other SmartBot products in 1999. See "Business -- Products."
The Company was incorporated in Delaware in November 1994 as Neurotec
International Corp., a wholly-owned subsidiary of Neurotec Hochtechnologie GmbH
("Neurotec GmbH"), a German multimedia and Internet solutions company owned by
Eberhard Schoneburg, Artificial Life's President, Chief Executive Officer and
Chairman, and two corporate investors: a major German retailer and an industrial
conglomerate. In July 1997, Mr. Schoneburg sold all of his shares of Neurotec
GmbH to the two remaining stockholders and contemporaneously purchased 100% of
the shares of Neurotec International Corp. from Neurotec GmbH. In August 1997,
the Company's name was changed to Artificial Life, Inc. The Company's principal
executive offices are located at Four Copley Place, Suite 102, Boston,
Massachusetts, 02116 and its telephone number is (617) 266-5542. The Company's
World Wide Web address is http://www.artificial-life.com. Information contained
on the Company's Web site shall not be deemed to be a part of this Prospectus.
RISK FACTORS
Through July 1997, the date on which Eberhard Schoneburg, the Company's
President, Chief Executive Officer and Chairman, purchased the Company from its
former German parent, the Company had engaged primarily in the provision of
software consulting services to such parent. Thereafter, the Company changed its
primary business focus from software consulting to the development, marketing
and support of its Alife suite of SmartBot software products. Accordingly, the
Company is in the initial phase of rolling out its software products and is
subject to certain risks inherent in launching new products. Moreover, the
market for "intelligent" agent-based software products for Internet-related use
is new and emerging, is rapidly evolving, has an increasing number of entrants
and will be subject to frequent and continuing changes in technology and
customer preference. To date, the Company has not sold any of its SmartBot
software products. For these reasons, the Company has no basis to predict
whether its products will perform as intended or whether customers will accept
and adopt its products in commercially significant numbers. The Company may
never sell sufficient numbers of its products to achieve or maintain
profitability. Therefore, an investment in the Company's stock is highly
speculative and subject to risk of loss. See "Risk Factors" beginning on page 7.
5
<PAGE> 8
THE OFFERING
Common Stock offered by the Company... 1,200,000 shares(1)
Common Stock offered by the Selling
Stockholder......................... 400,000 shares
Common Stock to be outstanding after
the Offering.......................... 9,070,574 shares(2)
Use of proceeds....................... The Company intends to use the net
proceeds of the Offering to fund
research and product development, to
expand its sales and marketing
capabilities, to establish strategic
alliances, to expand its employee
base and infrastructure and for
general corporate and working capital
purposes.
Proposed Nasdaq SmallCap Market
symbol................................ ALIF
- ---------------
(1) Does not include up to 164,800 shares of Common Stock registered hereby on
behalf of the Registering Stockholders which are subject to a lock-up
agreement between each of the Registering Stockholders and New York Broker,
Inc. and are not being offered on an underwritten basis and may not be sold
by the Registering Stockholders, without the consent of New York Broker,
Inc., until 180 days after the date of this Prospectus. See "Principal,
Selling and Registering Stockholders."
(2) Excludes 655,569 shares of Common Stock reserved for issuance upon the
exercise of stock options outstanding as of November 3, 1998 at a weighted
average exercise price of $4.06 per share and 160,000 shares of Common Stock
reserved for issuance upon the exercise of warrants to be sold to the
Representatives upon the consummation of the Offering at an exercise price
per share equal to 120% of the initial public offering price (the
"Representatives' Warrant").
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------------- ---------------------
1995 1996 1997 1997 1998
------ ------ ------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue........................................ $1,217 $2,790 $1,770 $1,409 $ 449
Income (loss) from operations.................. (618) 895 41 36 (1,289)
Net Income (loss).............................. (396) 543 21 18 (1,309)
Net income (loss) per share(1)................. $ (.07) $ .08 $ .00 $ .00 $ (.19)
Shares used in computing net income (loss) per
share(1)..................................... 5,574 6,967 6,967 6,967 7,013
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998
---------------------------
ACTUAL AS ADJUSTED(2)
------ -----------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash...................................................... $2,606 $ 8,754
Working capital........................................... 2,467 8,615
Total assets.............................................. 3,515 9,542
Total stockholders' equity................................ $2,660 $ 8,808
</TABLE>
- ---------------
(1) Net income (loss) per share is determined by dividing the net income (loss)
attributable to common stockholders by the weighted average number of Common
Stock and Common Stock equivalents outstanding during the period. See Note 2
of Notes to Financial Statements.
(2) As adjusted to give effect to the sale of the 1,200,000 shares of Common
Stock offered by the Company, after deducting the underwriting discounts and
the offering expenses, at an assumed initial public price of $6.50 per share
and the application of the estimated net proceeds therefrom as set forth in
"Use of Proceeds."
6
<PAGE> 9
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should carefully consider the following
risk factors, in addition to other information contained in this Prospectus,
before purchasing the shares of Common Stock offered hereby. Certain statements
in this Prospectus, including statements regarding the intent, belief or current
expectations of the Company or its management with respect to, among other
things, (i) the Company's goals and operating strategies, (ii) the anticipated
release of the Company's products and (iii) the Company's plans to distribute
and market its products, as well as other statements contained herein regarding
matters that are not historical facts, constitute "forward-looking statements."
Such forward-looking statements are not guarantees of future performance and
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance and achievements of the Company, or industry
results, to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, but are not limited to, those discussed in the following risk
factors.
RECENT CHANGE IN STRATEGY. The Company has recently changed its primary
business focus from software consulting to the development, marketing and
support of its Alife product suite of "intelligent" software robots (also known
as software agents). Accordingly, the Company is in the initial phase of rolling
out its software products and is subject to certain risks inherent in launching
new products. To address these risks, the Company must, among other things,
complete development of its software robot products, enter into strategic
relationships, marketing and distribution arrangements, respond to competitive
developments, and attract, retain and motivate qualified personnel. In addition,
because the Company has adopted this new business strategy, results of
operations to date are not reflective of the Company's future results of
operations. The Company's decision to develop, market and support software robot
products is predicated on the assumption that the demand for such products will
be large enough to permit the Company to operate profitably. There can be no
assurance that the Company's assumption will be correct or that the Company will
be able to successfully compete as a provider of such products. If the Company's
assumption is not accurate, or if the Company is unable to compete as a provider
of agent-based software products, the Company's business, prospects, financial
condition and results of operations will be materially adversely affected.
MINIMAL REVENUES AND RECENT LOSSES; PERIOD TO PERIOD COMPARISONS; LIMITED
OPERATING HISTORY; ANTICIPATION OF CONTINUED LOSSES. Since its incorporation in
November 1994, the Company has been engaged primarily in the provision of
software consulting services and to date has generated limited revenues. Through
1997, the Company had recorded cumulative net income of $146,480 primarily
through its software consulting business. As a consequence of the Company's
recent change in its primary business focus from software consulting to
developing, marketing and supporting its Alife suite of SmartBot software
products, the Company expects that an increasing percentage of its future
revenues will be derived from sales and services associated with its software
robot products and that revenues from its consulting business, as a percentage
of gross revenues, will significantly decrease over time. Accordingly, past
financial results do not reflect the results of the Company's current business
activities. In the nine month period ended September 30, 1998, the Company
incurred a net loss of $1,309,097. Furthermore, its limited operating history
leads the Company to believe that period-to-period comparisons of its operating
results are not meaningful and that the results for any period should not be
relied upon as an indication of future performance. The Company faces the risks
and problems associated with pursuing a new business strategy and has a limited
operating history on which to evaluate its future prospects. Such prospects
should be considered in light of the risks, expenses and difficulties frequently
encountered in launching new products in a new and emerging industry
characterized by rapid technological change, a number of potential market
entrants and intense competition. The Company expects to incur significant
losses until at least the year 2000. There can be no assurance that the Company
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will achieve or sustain significant revenues or become cash flow positive or
profitable in the near future or ever.
DEPENDENCE ON EMERGING MARKETS; ACCEPTANCE OF THE COMPANY'S PRODUCTS. The
Company's future financial performance will depend in large part on the growth
in demand for agent-based software products, such as the Company's suite of
SmartBot products. This market is new and emerging, is rapidly evolving, is
characterized by an increasing number of market entrants and will be subject to
frequent and continuing changes in customer preferences and technology. As is
typical in new and evolving markets, demand and market acceptance for the
Company's technologies is subject to a high level of uncertainty. Because the
market for the Company's products is evolving, it is difficult to assess or
predict with any assurance the size or growth rate, if any, of this market.
There can be no assurance that a significant market for the Company's products
will develop, or that it will develop at an acceptable rate or that new
competitors will not enter the market. In addition, even if a significant market
develops for such products, there can be no assurance that the Company's
products will be successful in such market. If a significant market fails to
develop, develops more slowly than expected or attracts new competitors, or if
the Company's products do not achieve market acceptance, the Company's business,
prospects, financial condition and results of operations will be materially
adversely affected.
COMPETITION. The market for the Company's products and services is new,
evolving and growing rapidly. Competition can be expected to intensify
significantly as the market matures and the more established software companies,
such as Microsoft Corporation, become increasingly involved. Barriers to entry
are relatively insubstantial. Although the Company has not yet identified any
competitors in exactly the same areas in which it is active, there are companies
that have overlapping activities and therefore could be regarded as competition
to Artificial Life. Such firms include, among others: Autonomy, Inc.; Big
Science Company; Brightware, Inc.; Broadvision, Inc.; Digital Marketing
Concepts, Inc.; Extempo, Inc.; General Magic, Inc.; GK Intelligent Systems,
Inc.; Haptek, Inc.; Intellix A/S; Kinetoscope, Inc.; Microsoft Corporation;
Netsage Corp.; Neuromedia, Inc.; Nuance, Inc.; SRA International, Inc. and
Virtual Personalities, Inc. This list may not be complete and may change and
substantially increase over time. The Company believes that the principal
competitive factors affecting the market for the Company's products include core
technology, delivery methods, brand recognition, ease of use and interfaces. The
relative importance of each of these factors depends upon the specific customer
involved. There can be no assurance that the Company will be able to compete
effectively with respect to any of these factors.
The Company's present or future competitors may be able to develop products
comparable or superior to those offered by the Company or adapt more quickly
than the Company to new technologies or evolving customer requirements. In order
to be successful in the future, the Company must respond to technological
change, customer requirements and competitors' current products and innovations.
In particular, while the Company is currently developing products and product
enhancements that it believes address customer requirements, there can be no
assurance that the Company will successfully complete the development or
introduction of these products and product enhancements on a timely basis or
that these products and product enhancements will achieve market acceptance.
Accordingly, there can be no assurance that the Company will be able to compete
effectively in its market, that competition will not intensify or that future
competition will not have a material adverse effect on the Company's business,
prospects, financial condition and results of operations. See
"Business -- Competition."
PRODUCT CONCENTRATION. The Company expects to derive an increasing
percentage of its revenues from sales of its SmartBot software robot products
and associated services. Broad market acceptance of these products is critical
to the Company's future success. As a result, failure to achieve broad market
acceptance, or, if achieved, future declines in demand of these products as a
result of competition, technological change, ease of use or otherwise would have
a material adverse effect on the Company's business, prospects, financial
condition and results of operations. In addition, the Company's future financial
performance may depend in part on the successful
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development, introduction and customer acceptance of future versions of the
Company's software robot products, and there can be no assurance that any such
future products will achieve market acceptance. See "Business -- Products."
PRODUCT DEFECTS AND PRODUCT LIABILITY. The Company's software robot
products are complex and could from time to time contain design defects or
software errors that could be difficult to detect and correct. The Company's
products have not yet been released for commercial use. Thus, there can be no
assurance that, despite testing by the Company, errors will not be found in the
Company's products once they are commercially released which could result in
delay in or inability to achieve market acceptance and thus could have a
material adverse effect upon the Company's business, prospects, financial
condition and results of operations.
Because the Company's software robot products can be used by its clients to
perform mission critical functions, design defects, software errors, misuse of
the Company's products, incorrect data from external sources or other potential
problems within or out of the Company's control that may arise from the use of
the Company's products could result in financial or other damages to the
Company's clients. The Company maintains only limited product liability
insurance, and such insurance may likely not be adequate to effectively protect
the Company against product liability claims and the costs and expenses
associated therewith. The Company anticipates that its sales and licensing
agreements with its clients will typically contain provisions designed to limit
the Company's exposure to potential claims. Such provisions, however, may not
effectively protect the Company against such claims and the liability and costs
associated therewith. Accordingly, any such claim could have a material adverse
effect upon the Company's business, prospects, financial condition and results
of operations.
RAPID TECHNOLOGICAL CHANGE. To remain competitive, the Company must
continue to enhance and improve the ease of use, responsiveness, functionality
and features of its family of SmartBot software robot products. The industry in
which the Company operates is characterized by rapid technological change,
changes in user and customer requirements and preferences, frequent new products
and service introductions embodying new technologies and the emergence of new
industry standards and practices that could render the Company's existing
products and proprietary technology and software obsolete. The Company's success
will depend, in part, on its ability to enhance its existing products, develop
new products and technologies that address the increasingly sophisticated and
varied needs of its customers, and respond to technological advances and
emerging industry standards and practices on a cost-effective and timely basis.
There can be no assurance that the Company will successfully develop, license or
acquire and implement new technologies or adapt its proprietary technology and
products to customer requirements or emerging industry standards. If the Company
is unable, for technical, legal, financial or other reasons, to adapt in a
timely manner in response to changing market conditions or customer
requirements, the Company's business, prospects, financial condition and results
of operations would be materially adversely affected.
DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL PERSONNEL. The Company's
performance is substantially dependent on the continued services and performance
of its senior management and other key personnel, particularly Eberhard
Schoneburg, the Company's President, Chief Executive Officer and Chairman. The
Company has entered into an employment agreement with Mr. Schoneburg, as well as
with Robert Pantano, its Chief Financial Officer, and Klaus Kater, its Chief
Technology Officer. The Company does not maintain key man life insurance on any
of its senior management or key personnel. The Company's performance also
depends upon the Company's ability to retain and motivate its other officers and
key employees. The loss of the services of any of its executive officers or
other key employees could have a material adverse effect on the Company's
business, prospects, financial condition and results of operations. The
Company's future success also depends on its ability to identify, attract, hire,
train, retain and motivate other highly skilled software engineers and
managerial and marketing personnel. There is currently a shortage of qualified
software engineers and programmers. Competition for such personnel is intense,
and there can be no assurance that the Company will be able to successfully
attract,
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<PAGE> 12
integrate or retain sufficiently qualified personnel. The failure to attract and
retain the necessary personnel could have a material adverse effect on the
Company's business, prospects, financial condition and results of operations.
See "Business -- Employees" and "Management."
DEPENDENCE ON THIRD PARTY CONTRACTORS. The Company intends to use
consultants to complete portions of the development work on its Alife suite of
SmartBot software products and to assist customers in the installation and
support of the Company's SmartBot software products. Competition for such
personnel is intense. There can be no assurance that the Company will be
successful in attracting or retaining such consultants. In addition, the
Company's ability to provide its software consulting services and introduce its
products is dependent, in part, on the ability of these independent consultants
to complete their engagements in a timely and cost-effective manner. In
particular, consulting resources will be required to install, support and
customize the Company's software products, including creating the content of the
Knowledge Bases. Therefore, the availability of such resources will directly
impact sales of such products. Some of these consultants will be employees of
other companies who will only be able to work on the Company's products on a
part-time basis. If the Company is not successful in attracting the necessary
consultants or if such consultants cannot complete the necessary tasks in a
timely and cost-effective manner, the Company's business, prospects, financial
condition and results of operations could be materially adversely affected.
RISKS ASSOCIATED WITH INTERNATIONAL SALES. A key component of the
Company's strategy is to expand its sales in foreign markets, especially in
Europe. The Company anticipates that it will expend significant financial and
management resources to develop programs of partnering and strategic investments
internationally. If the revenues generated by these marketing programs are
insufficient to offset the expense of establishing and maintaining such
programs, the Company's business, prospects, financial condition and results of
operations could be materially adversely affected. There can be no assurance
that the Company will be able to expand its sales in foreign markets.
The Company and its President, Chief Executive Officer and Chairman are
subject to a non-competition agreement with Neurotec GmbH which prohibits them
from competing in certain internet commerce and multimedia development
activities in Europe through December 31, 1998. To the extent that the Company
is unable to pursue business opportunities in these areas that would otherwise
exist, the Company's business, prospects, financial condition and results of
operations could be materially adversely affected.
The Company's international sales are subject to certain risks not inherent
in its domestic sales, including political and economic instability in foreign
markets, restrictive trade policies of foreign governments, local economic
conditions in foreign markets, potentially adverse tax consequences and the
burdens on customers of complying with a variety of applicable laws. All of such
factors may suppress demand for the Company's services and products. The impact
of such factors on the Company's business is inherently unpredictable. There can
be no assurance that such factors will not have a material adverse effect upon
the Company's revenues from international sales and, consequently, the Company's
business, prospects, financial condition and results of operations. See
"Business -- Strategy."
DEPENDENCE ON CONTINUED GROWTH OF INTERNET AND ONLINE COMMERCE. The
Company's future revenues and any future profits are in a large part dependent
upon the willingness of consumers to accept the Internet as an effective medium
of commerce and for obtaining information. The Company is especially dependent
upon the long-term acceptance and growth of online commerce. Rapid growth in the
use of and interest in online services is a recent phenomenon, and there can be
no assurance that such acceptance and use will continue to develop or that a
sufficiently broad base of consumers will adopt and continue to use the Internet
and other online services as a medium of commerce. Demand and market acceptance
for recently introduced services and products over the
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<PAGE> 13
Internet are subject to a high level of uncertainty. For the Company to be
successful, consumers must accept and utilize this novel way of conducting
business and obtaining information.
The Internet may not be accepted by consumers as a viable commercial
marketplace for a number of reasons, including potentially inadequate
development of the necessary network infrastructure or delayed development of
enabling technologies and performance improvements. To the extent that online
services continue to experience significant growth in the number of users, their
frequency of use or an increase in their bandwidth requirements, there can be no
assurance that the infrastructure of the Internet and other online services will
be able to support the demands placed upon them. In addition, Internet services
could lose their viability due to delays in the development or adoption of new
standards and protocols required to handle increased levels of online activity
or due to increased government regulation. Changes in or insufficient
availability of telecommunications services to support Internet services also
could result in slower response times and adversely affect usage of the Internet
and other online services generally. If use of the Internet and other online
services does not continue to grow or grows more slowly than expected, if the
infrastructure for Internet services does not effectively support the growth
that may occur, or if the Internet does not become a viable commercial
marketplace, the Company's business, prospects, financial condition and results
of operations would be materially adversely affected.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS. The Company will be
relying upon trade secrets, know-how, copyrights and continuing technological
innovations to develop and maintain its competitive position. The Company seeks
to protect such information, in part, by confidentiality agreements with its
corporate partners, collaborators, employees and consultants. These agreements
provide that all confidential information developed or made known during the
course of the individual's or entity's relationship with the Company is to be
kept confidential and not be disclosed to third parties except in specific
circumstances. The Company has caused each of its employees to execute forms of
Confidentiality and Inventions Agreements which provide that, to the extent
permitted by applicable law, all inventions conceived by the individual during
the individual's employment are the exclusive property of the Company. There can
be no assurance that these agreements will not be breached, that the Company
would have adequate remedies for any breach, or that the Company's trade secrets
will not otherwise become known or be independently discovered by competitors.
Further, there can be no assurance that the Company will be able to protect its
trade secrets and copyrights, or that others will not independently develop
substantially equivalent proprietary information and techniques.
The Company has no patents or patent applications pending, nor does it have
any registered copyrights. There can be no assurance that the existing or future
patents of third parties will not have an adverse effect on the ability of the
Company to continue to commercialize its products. Furthermore, there can be no
assurance that other companies will not independently develop similar products
or duplicate any of the Company's planned products or obtain patents that will
require the Company to alter its products or processes, pay licensing fees or
cease development of its planned products. The occurrence of any such event may
have a material adverse effect on the Company's business, prospects, financial
condition and results of operations. See "Business -- Intellectual Property and
Other Proprietary Rights."
NEED FOR ADDITIONAL CAPITAL. The Company currently believes the net
proceeds of the Offering, together with the Company's existing cash, cash
equivalents, short-term investments and other cash generated from operations,
will enable the Company to maintain its current and planned operations at least
through July 2000, although there can be no assurance that the Company will not
have additional capital needs prior to such time. Delays in the completion of
software development programs are common in the industry. If the Company
experiences delays in the scheduled development of its initial SmartBot software
robot products, it may require substantial additional funds until such time as
products are completed and cash generated from sales of products and services is
sufficient to fund continued growth of the business. In the event that such
additional financing is necessary, the Company may seek to raise such funds
through public or private equity
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or debt financing or other means. No assurance can be given that additional
financing will be available when needed, or that, if available, such financing
will be obtained on terms acceptable to the Company. To the extent that the
Company raises additional capital by issuing equity securities, ownership
dilution will result to existing stockholders. In the event that adequate funds
are not available, the Company's business, prospects, financial condition and
results of operations may be materially adversely affected. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results and Operations -- Liquidity and Capital Resources."
RISKS ASSOCIATED WITH BRAND DEVELOPMENT. The Company believes that
establishing and maintaining brand identity is a critical aspect of its
strategy. Furthermore, the Company believes that brand recognition will become
increasingly important as low barriers to entry encourage competition in the
software robot industry. In order to attract and retain customers and strategic
partners, and in response to competitive pressures, the Company intends to
substantially increase its financial commitment to the creation and maintenance
of brand development. The Company plans to accomplish this, although not
exclusively, through advertising campaigns in several forms of media, including
radio, television, print and trade shows, with a particular emphasis on the
Internet channels. If the Company does not generate a corresponding increase in
revenue as a result of its branding efforts or otherwise fails to promote its
brand successfully, or if the Company incurs excessive expenses in an attempt to
promote and maintain its brand, the Company's business, prospects, financial
condition and results of operations would be materially adversely affected.
RISKS OF DOING BUSINESS ABROAD. The Company anticipates that some of the
consultants it may hire to complete portions of the development work on its
products may be located in foreign countries. In addition, the Company intends
to organize subsidiaries in foreign countries. As a result, the Company may be
subject to a number of risks, including, among other things, difficulties
relating to administering its business globally, managing foreign operations,
currency fluctuations, restrictions against the repatriation of earnings, export
requirements and restrictions, and multiple and possibly overlapping tax
structures. The realization of any of the foregoing could have a material
adverse effect on the Company's business, prospects, financial condition and
results of operations.
On January 1, 1999, a new currency called the "euro" is scheduled to be
adopted as the common legal currency in eleven of the fifteen member countries
of the European Union. During 2002, all European Union countries are expected to
be operating with the euro as their single currency. Uncertainty exists as to
the effect the euro will have on the marketplace. Additionally, all of the final
rules and regulations have not yet been defined and finalized by the European
Commission with regard to the euro currency. The Company cannot yet predict the
anticipated impact of the euro conversion on the Company.
DEPENDENCE ON THIRD PARTY LICENSES. The Company is designing its SmartBot
software products to recognize voice input as well as text-based input. The
voice recognition capabilities of these products will depend to a large extent
on the availability of highly accurate voice recognition software packages,
which the Company intends to license from third parties rather than develop
itself. The Company believes that the success of its products will depend to a
large extent on its ability to allow users to interact in a natural
conversational manner. There can be no assurance that the Company will be
successful in identifying third party voice recognition software which will
successfully interact with its products or that the Company will be able to
license such software products on commercially reasonable terms, or at all.
Failure by the Company to successfully identify viable voice recognition
software or enter into license agreements could have a material adverse effect
on the Company's business, prospects, financial condition and results of
operations.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES. The Company believes that
it is not currently subject to direct regulation by any domestic or foreign
governmental agency, other than regulations applicable to businesses generally.
However, due to the increasing popularity and use of the Internet, it is
possible that a number of domestic and foreign laws and regulations covering
issues such as user privacy, pricing, content, copyrights, distribution and
characteristics and quality of
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products and services are being considered and may be enacted. The European
Community has already adopted a directive restricting the use of personal data.
The adoption of such laws or regulations may decrease the growth in use of the
Internet, which would, in turn, decrease the demand for the Company's products
and services and increase the Company's cost of doing business. Moreover, the
applicability to online services of existing domestic and foreign laws in
various jurisdictions governing issues such as intellectual property ownership,
sales and other taxes, libel and personal privacy is uncertain and may take
years to resolve. Any such new legislation or regulation, the application of
laws and regulations from jurisdictions whose laws do not currently apply to the
Company's business, or the application of existing laws and regulations to
online services could have a material adverse effect on the Company's business,
prospects, financial condition and results of operations.
Tax authorities in a number of states are currently reviewing the
appropriate tax treatment of companies engaged in Internet commerce. New state
tax regulations may subject the Company to additional state sales and income
taxes. As some of the Company's products will be available over the Internet in
multiple states and foreign countries, such jurisdictions may claim that the
Company is required to qualify to do business as a foreign corporation in each
such state and foreign country. The failure by the Company to qualify as a
foreign corporation in a jurisdiction where it is required to do so could
subject the Company to taxes and penalties for the failure to do so. It is
possible that the governments of other states and foreign countries also might
attempt to regulate the Company's transmissions of content on its Web sites or
prosecute the Company for violations of their laws. There can be no assurance
that violations of local laws will not be alleged or charged by state or foreign
governments, that the Company might not unintentionally violate such law or that
such laws will not be modified, or new laws enacted, in the future.
In addition, several telecommunications carriers are petitioning to have
telecommunications over the Internet regulated by the Federal Communications
Commission (the "FCC") in the same manner as other telecommunications services.
In addition, because the growing popularity and use of the Internet has burdened
the existing telecommunications infrastructure and many areas with high Internet
use have begun to experience interruptions in phone service, local telephone
carriers, such as Pacific Bell, have petitioned the FCC to regulate Internet
service providers ("ISPs") and online service providers ("OSPs") in a manner
similar to long distance telephone carriers and to impose access fees on the
ISPs and OSPs. If either of these petitions is granted, or the relief sought
therein is otherwise obtained, the costs of communicating on the Internet could
increase substantially, potentially slowing the growth in use of the Internet.
Any such new legislation or regulation or application or interpretation of
existing laws could have a material adverse effect on the Company's business,
prospects, financial condition and results of operations.
INTERNET COMMERCE SECURITY RISKS. A significant barrier to electronic
commerce and communications is the secure transmission of confidential
information over public networks. The Company relies on encryption and
authentication technology licensed from third parties to provide the security
and authentication necessary to effect secure transmission of confidential
information. There can be no assurance that advances in computer capabilities,
new discoveries in the field of cryptography or other events or developments
will not result in a compromise or breach of the algorithms used by the Company
to protect data. If any such compromise of the Company's security were to occur
it could have a material adverse effect on the Company's business, prospects,
financial condition and results of operations. The Company may be required to
expend significant capital and other resources to protect against the threat of
such security breaches or to alleviate problems caused by such breaches.
Concerns over the security of Internet transactions and the privacy of users may
also inhibit the growth of the Internet generally, and the Web in particular,
especially as a means of conducting commercial transactions. To the extent that
activities of the Company or third party contractors involve the storage and
transmission of proprietary information, security breaches could expose the
Company to a risk of loss or litigation and possible liability. There can be no
assurance that the Company's security measures will prevent security breaches or
that failure to prevent such
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security breaches would not have a material adverse effect on the Company's
business, prospects, financial condition and results of operations.
YEAR 2000 COMPLIANCE. The Company uses a significant number of computer
software programs and operating systems in its internal operations. The use of
computer programs that rely on two-digit date programs to perform computations
and decision-making functions may cause computer systems to malfunction in the
Year 2000 and lead to significant business delays and disruptions. The Company
has analyzed the software applications that it uses or has developed and
believes that they are Year 2000 compliant. However, until the Year 2000
arrives, the Company cannot be absolutely certain that its analysis is correct.
The costs of any Year 2000 remedial modifications must be expensed in the year
incurred, and thus will impact the Company's earnings. The Company is currently
unable to predict the extent to which it would be vulnerable to any failure by
its clients or suppliers to remediate any Year 2000 issues on a timely basis.
The failure of a client or supplier subject to the Year 2000 to convert its
systems on a timely basis or a conversion that is incompatible with the
Company's systems could have a material adverse effect on the Company's
business, prospects, financial condition and results of operations. In addition,
the Company's products are designed to operate with third party software and
data. The operation of the Company's existing and proposed products will be
adversely affected if such third party software and data are not Year 2000
compliant or if such third parties have not used compatible technology in
achieving compliance. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year 2000."
BROAD DISCRETION OF MANAGEMENT AS TO USE OF PROCEEDS. While the Company
has no specific plan at this time for the use of the net proceeds of the
Offering, it expects to use such proceeds (i) to fund research and product
development, (ii) to increase its sales and marketing capabilities, both
domestically and internationally, by expanding its marketing and promotional
programs, (iii) to establish strategic alliances, (iv) to make strategic
acquisitions and investments, (v) to increase its employee base and expand the
Company's infrastructure and (vi) for general corporate purposes, including
working capital. The Company may use a portion of such net proceeds to acquire
or invest in businesses, technologies, services or products that are
complementary to those of the Company. While the Company may from time to time
evaluate such potential acquisitions, investments or other transactions, the
Company currently has no understandings, commitments or agreements with respect
to any acquisitions. The Company has not determined the amounts it plans to
expend with respect to each of the expected uses or the timing of such
expenditures. Accordingly, management will have broad discretion with respect to
the expenditure of such proceeds. Purchasers of shares of Common Stock offered
hereby will be entrusting their funds to the Company's management, upon whose
judgment they must depend, with limited information concerning the specific
working capital requirements and general corporate purposes to which the funds
will ultimately be applied. See "Use of Proceeds."
CONTROL BY PRINCIPAL STOCKHOLDER. Upon completion of the Offering,
Eberhard Schoneburg, the Company's President, Chief Executive Officer and
Chairman, will beneficially own approximately 61.4% of the outstanding shares of
Common Stock (approximately 59.8% if the Underwriters' over-allotment option is
exercised in full). Additionally, prior to September 25, 1998, Mr. Schoneburg,
as sole director of the Company, approved certain transactions between the
Company and related entities. See "Certain Transactions." Accordingly, although
the Company intends to submit such transactions to the independent members of
the Board of Directors, Mr. Schoneburg will retain the voting power to exercise
control over the election of members of the Board of Directors as well as any
decision whether to merge or sell the assets of the Company, adopt, amend or
repeal the Company's Certificate of Incorporation, or take other actions
requiring the vote or consent of the Company's stockholders. In addition, such a
concentration of ownership may have the effect of delaying or preventing a
change in control of the Company, and may also impede or preclude transactions
in which stockholders might otherwise receive a premium for their shares over
current
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market prices. See "Management -- Directors and Executive Officers" and
"Principal, Selling and Registering Stockholders."
POTENTIAL ADVERSE EFFECT OF ANTI-TAKEOVER PROVISIONS. Upon consummation of
the Offering, the Company's Certificate of Incorporation will authorize the
Board of Directors to issue, without stockholder approval, 5,000,000 shares of
Preferred Stock with voting, conversion and other rights and preferences that
could adversely affect the voting power or other rights of the holders of Common
Stock. The issuance of Preferred Stock or of rights to purchase Preferred Stock
could be used to discourage an unsolicited acquisition proposal. In addition,
the possible issuance of Preferred Stock could discourage a proxy contest, make
more difficult the acquisition of a substantial block of the Company's Common
Stock or limit the price that investors might be willing to pay in the future
for shares of the Company's Common Stock. The Certificate of Incorporation also
provides that: (i) the affirmative vote of the holders of at least 70% of the
voting power of all of the then outstanding shares of the capital stock of the
Company, voting together as a single class, shall be required for the
stockholders to adopt, amend or repeal any provisions of the Bylaws of the
Company; (ii) stockholders of the Company may not take any action by written
consent without a meeting; (iii) the Board of Directors will be classified into
three classes with staggered terms of three years each; and (iv) so long as
Eberhard Schoneburg directly or beneficially owns at least a majority of the
outstanding shares of capital stock then entitled to vote at an election of the
directors, members of the Board of Directors may be removed from office at any
time with or without cause by the affirmative vote of the holders of a majority
of the outstanding shares of capital stock then entitled to vote, but if at any
time Mr. Schoneburg shall cease to directly or beneficially own at least a
majority of the outstanding shares of capital stock then entitled to vote at an
election of the directors, members of the Board of Directors may be removed from
office only for cause by the affirmative vote of the holders of a majority of
the outstanding shares of capital stock then entitled to vote (a director may be
removed for cause only after a reasonable notice and opportunity to be heard by
the stockholders). The Company's Bylaws provide that, for nominations to the
Board of Directors or for other business to be properly brought by a stockholder
before a meeting of stockholders, the stockholder must first have given timely
notice thereof in writing to the Secretary of the Company. To be timely, a
stockholder's notice generally must be delivered not less than 60 days nor more
than 90 days prior to the annual meeting. If the meeting is not an annual
meeting, the notice must generally be delivered not more than 90 days prior to
the special meeting and not later than the later of 60 days prior to the special
meeting or ten days following the day on which public announcement of the
meeting is first made by the Company. The foregoing provisions of the Company's
Certificate of Incorporation and Bylaws could have the effect of delaying,
deterring or preventing a change in control of the Company. Delaware law also
contains provisions that may have the effect of delaying, deterring or
preventing a non-negotiated merger or other business combination involving the
Company. These provisions are intended to encourage any person interested in
acquiring the Company to negotiate with and obtain the approval of its Board of
Directors in connection with the transaction. Certain of these provisions may,
however, discourage a future acquisition of the Company not approved by the
Board of Directors in which stockholders might receive an attractive value for
their shares or that a substantial number or even a majority of the Company's
stockholders might believe to be in their best interest. As a result,
stockholders who desire to participate in such a transaction may not have the
opportunity to do so. See "Description of Capital Stock -- Delaware Law and
Certain Charter and Bylaw Provisions."
SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON FUTURE MARKET
PRICE. Sales of Common Stock (including Common Stock issued upon the exercise
of outstanding options) in the public market after this Offering could
materially adversely affect the market price of the Common Stock. These sales
also might make it more difficult for the Company to sell equity securities or
equity-related securities in the future at a time and price that the Company's
management deems acceptable, or at all. Upon the completion of this Offering,
the Company will have 9,070,574 shares of Common Stock outstanding, assuming no
exercise of options or the Representatives' Warrant and assuming no exercise of
the Underwriters' over-allotment option. Of these outstanding shares
15
<PAGE> 18
of Common Stock, the 1,600,000 shares sold in this Offering will be freely
tradeable, without restriction under the Securities Act of 1933, as amended (the
"Securities Act"), unless purchased by "affiliates" of the Company, as that term
is defined in Rule 144 under the Securities Act. The remaining 7,470,574 shares
of Common Stock held by existing stockholders are "restricted securities" as
that term is defined in Rule 144 and were issued and sold by the Company in
reliance on exemptions from the registration requirements of the Securities Act.
These shares may be resold in the public market only if registered or pursuant
to an exemption from registration, such as Rule 144. All officers, directors and
certain holders of Common Stock beneficially owning, in the aggregate, 6,678,360
shares of Common Stock and holders of options to purchase 431,244 shares of
Common Stock, have agreed, pursuant to certain lock-up agreements, that they
will not offer, sell, contract to sell, grant any option to sell, pledge,
hypothecate or otherwise dispose of, directly or indirectly, any shares of
Common Stock owned by them, or that could be purchased by them through the
exercise of options to purchase Common Stock of the Company, for a period of one
year after the date of this Prospectus without the prior written consent of New
York Broker, Inc., and, with respect to certain other stockholders owning, in
the aggregate, 164,800 shares of Common Stock, for a period of 180 days after
the date of this Prospectus without the prior written consent of New York
Broker, Inc. Upon expiration of the lock-up agreements, all shares of Common
Stock currently outstanding will be immediately eligible for resale, subject to
the requirements of Rule 144. Immediately following the completion of this
Offering, holders of 1,122,314 shares of Common Stock will be entitled to
certain registration rights. However, pursuant to the lockup agreements, 104,983
of these shares of Common Stock may not be sold for one year after the date of
this Prospectus without the prior written consent of New York Broker, Inc. If
such holders, by exercising their rights, cause a large number of shares to be
registered and sold on the public market, such sales could have a material
adverse effect on the market price of the Company's Common Stock. The Company
has registered an aggregate of 164,800 shares of Common Stock on behalf of the
Registering Stockholders; however, such shares may not be sold, without the
consent of New York Broker, Inc., until 180 days after the date of this
Prospectus. The Company intends to file a registration statement covering the
1,173,917 shares of Common Stock issuable or reserved for issuance under the
1998 Equity Incentive Plan and, upon filing, any shares subsequently issued
under such plans will be eligible for sale in the public market, subject to
compliance with Rule 144 in the case of affiliates of the Company. The Company
is unable to predict the effect such sales may have on the then prevailing
market price of the Common Stock. See "Management -- Stock Plans," "Description
of Capital Stock" and "Shares Eligible for Future Sale."
BENEFITS OF THE OFFERING TO CURRENT STOCKHOLDERS AND RELATED PARTIES. The
completion of this Offering will provide significant benefits to the current
stockholders of the Company, including certain of its directors and officers.
The Company will not receive any of the gross proceeds from the sale of shares
by the Selling Stockholder (the Company's President, Chief Executive Officer and
Chairman), which will be approximately $2.6 million (for which he paid $28,000),
based upon an assumed initial public offering price of $6.50 per share. The
completion of this Offering will also create a public market for the Common
Stock and thereby is likely to substantially increase the market value of the
Common Stock held by current stockholders in the Company over their original
purchase price. Upon the closing of this Offering, based upon an assumed initial
public offering price of $6.50 per share, the difference between the aggregate
purchase price paid by the Company's current stockholders (excluding management
and the Selling Stockholder) for their shares and the aggregate market value of
such shares will be approximately $2.5 million and the difference between the
aggregate purchase price paid or payable by the Company's directors and officers
for their shares and shares subject to options held by them and the aggregate
market value of such shares will be approximately $40 million.
NO PUBLIC MARKET FOR THE COMMON STOCK; PRICE AND MARKET VOLATILITY. Prior
to the Offering there has been no public market for the Company's Common Stock,
and there can be no assurance that an active public market for the Common Stock
will develop or be sustained after the Offering. The initial offering price will
be determined by negotiation between the Company and the Represent-
16
<PAGE> 19
atives based upon several factors. See "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price. The
market price of the Company's Common Stock is likely to be highly volatile and
could be subject to wide fluctuations in response to quarterly variations in
operating results, announcements of technological innovations or new products
introduced by the Company or its competitors, or changes in financial estimates
by securities analysts, or other events or factors. In addition, the stock
market has experienced significant price and volume fluctuations that have
particularly affected the market price of equity securities of many high
technology companies and that often have been unrelated to the operating
performance of such companies. In the past, following periods of volatility in
the market price of a company's securities, securities class action litigation
has often been instituted against such a company. Such litigation could result
in substantial costs and a diversion of management's attention and resources,
which would have a material adverse effect on the Company's business, prospects
financial condition and results of operations. These broad market fluctuations
may adversely affect the market price of the Company's Common Stock. See
"Underwriting".
If shares of the Company's Common Stock are traded, they may trade at a
discount from the price paid for such shares, depending upon the market for
similar securities and other factors. No assurance can be given that a holder of
Common Stock will be able to sell the Common Stock in the future or that such
sale will be at a price equal to or higher than the price paid for such Common
Stock. No assurance can be given as to the liquidity of any trading market for
the Common Stock. The liquidity of any market for the Common Stock will depend
upon the number of holders of Common Stock, the interest of securities dealers
in making a market in the Common Stock, if any, and other factors.
COMPLIANCE WITH NASDAQ LISTING REQUIREMENTS. The Company's Common Stock
will be quoted on the Nasdaq SmallCap Market (the "SmallCap Market"). In order
to continue to be included in the SmallCap Market, a company must meet certain
maintenance criteria. Effective February 1998, the SmallCap Market maintenance
criteria require that a company must have (i) $2,000,000 in net tangible assets
or a $35,000,000 market capitalization or $500,000 of net income in two of the
last three years, (ii) a minimum bid price of $1.00 per share and (iii) a public
float of 1,000,000 shares. Failure to meet the SmallCap Market maintenance
criteria may result in the delisting of the Company's Common Stock. Trading, if
any, in the Company's Common Stock would thereafter be conducted in the
over-the-counter market. As a result of such delisting, an investor may find it
more difficult to dispose of, or to obtain accurate quotations as to the market
value of, the Company's Common Stock.
IMMEDIATE AND SUBSTANTIAL DILUTION. Purchasers of shares of Common Stock
in this Offering will suffer immediate and substantial dilution in net tangible
book value of $5.53 per share, or 85%, from the initial public offering price.
See "Dilution."
ABSENCE OF DIVIDENDS. No cash dividends have been paid on the Common Stock
to date and the Company does not anticipate paying cash dividends on the Common
Stock in the foreseeable future. See "Dividend Policy."
17
<PAGE> 20
USE OF PROCEEDS
The net proceeds from the sale of the 1,200,000 shares of Common Stock
offered by the Company, after deducting underwriting discounts and commissions
and estimated offering expenses, are estimated to be $6,148,500 ($7,583,700 if
the Underwriters' over-allotment option is exercised in full), assuming an
initial public offering price of $6.50 per share. The Company will not receive
any proceeds from the sale of the 400,000 shares of Common Stock offered by the
Selling Stockholder. See "Principal, Selling and Registering Stockholders."
At this time, the principal purposes of the Offering are to obtain
additional capital, to create a public market for the Common Stock so that the
Common Stock might be used by the Company instead of cash to establish strategic
alliances and for acquisitions, and to facilitate future access by the Company
to public equity markets. While the Company has no specific plan at this time
for use of the net proceeds of the Offering, it expects to use such proceeds (i)
to fund research and product development, (ii) to increase its sales and
marketing capabilities, both domestically and internationally, by expanding its
marketing and promotional programs and establishing overseas sales offices,
(iii) to establish strategic alliances, (iv) to make strategic acquisitions and
investments, (v) to increase its employee base and expand the Company's
infrastructure and (vi) for general corporate purposes, including working
capital. The Company may also use a portion of such net proceeds to acquire or
invest in businesses, technologies, services or products that are complementary
to those of the Company. While the Company may from time to time evaluate such
potential acquisitions, investments, or other transactions, the Company
currently has no understandings, commitments or agreements with respect to any
acquisitions. The Company has not determined the amounts it plans to expend with
respect to each of the expected uses or the timing of such expenditures. As a
consequence, management will have the discretion to allocate the net proceeds
from this Offering. The amounts actually expended for each use may vary
significantly depending on a number of factors, including the amount of future
revenue, the amount of cash generated or used by the Company's operations, the
progress of the Company's sales and marketing efforts, the ability of the
Company to enter into collaborative arrangements, the success of the Company's
recruiting efforts, the status of competitive products and acquisition
opportunities presented to the Company. Pending such uses, the net proceeds to
the Company from this Offering will be invested in short-term, investment-grade,
interest-bearing instruments. See "Risk Factors -- Broad Discretion of
Management as to Use of Proceeds."
The Company is presently in preliminary discussions with two potential
joint venture partners regarding the establishment of e-commerce and Internet
banking joint ventures in 1999. If the Company were to successfully conclude
agreements with each of these parties, the Company might allocate up to $2.5
million of the proceeds of this Offering to the purchase of minority interests
in such joint ventures. To date, the parties have not reached any understanding
or agreement in connection with such joint ventures. There can be no assurance
that either proposed joint venture will be consummated. See
"Business -- Strategic Alliances and Joint Ventures."
The Company currently believes the net proceeds of the Offering, together
with the Company's existing cash, cash equivalents, short-term investments and
other cash generated from operations, will enable the Company to maintain its
current and planned operations at least through July 2000. There can be no
assurance, however, that this will be the case. See "Risk Factors -- Need for
Additional Capital" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock and does not
anticipate paying any cash dividends in the foreseeable future. The Company
currently intends to retain future earnings, if any, to fund the development of
its business. See "Risk Factors -- Absence of Dividends."
18
<PAGE> 21
CAPITALIZATION
The following table sets forth, as of September 30, 1998, (i) the actual
capitalization of the Company, and (ii) the capitalization of the Company as
adjusted to reflect the sale of the Representatives' Warrant and the 1,200,000
shares of Common Stock offered by the Company at an assumed initial public
offering price of $6.50 per share, after deducting underwriting discounts and
commissions and estimated offering expenses and the application of the estimated
net proceeds therefrom as set forth in "Use of Proceeds." This table should be
read in conjunction with the Company's Financial Statements, including the Notes
thereto, and other financial information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
-------------------------
ACTUAL AS ADJUSTED(1)
-------- --------------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt.............................................. $ 500.0 $ 500.0
Stockholders' equity:
Preferred Stock, $0.01 par value, no shares authorized,
issued or outstanding, actual; 5,000,000 shares
authorized, no shares issued and outstanding as
adjusted.................................................. -- --
Common Stock, $0.01 par value, 19,000,000 shares authorized,
7,817,296 shares issued and outstanding actual; 30,000,000
shares authorized, 9,070,574 shares issued and outstanding
as adjusted(2)............................................ 78.2 90.7
Non-Voting Common Stock, $0.01 par value, 1,000,000 shares
authorized, 53,278 shares issued and outstanding actual;
no shares authorized, issued and outstanding
as adjusted............................................... .5 --
Additional paid-in capital.................................. 4,732.4 10,868.9
Subscriptions and notes receivable from stockholders........ (988.7) (988.7)
Representatives' Warrant.................................... -- .1
Accumulated deficit......................................... (1,162.6) (1,162.6)
-------- ---------
Total long-term debt and stockholders' equity..... $3,159.8 $ 9,308.4
======== =========
</TABLE>
- ---------------
(1) Also gives effect to (i) the conversion of all Non-Voting Common Stock into
shares of Common Stock on a 1-for-1 basis upon consummation of the Offering,
(ii) the adoption of the Certificate of Incorporation, to be effective upon
closing of the Offering, removing the Company's existing class of Non-Voting
Common Stock and creating a class of undesignated Preferred Stock, and (iii)
the sale and issuance of the Representatives' Warrant upon consummation of
the Offering.
(2) Excludes 655,569 shares of Common Stock reserved for issuance upon the
exercise of stock options outstanding as of November 3, 1998 at a weighted
average exercise price of $4.06 per share and 160,000 shares of Common Stock
reserved for issuance upon the exercise of the Representatives' Warrant.
19
<PAGE> 22
DILUTION
The net tangible book value of the Company as of September 30, 1998 was
$2,659,779 or approximately $.34 per share. "Net tangible book value" per share
represents the total tangible assets of the Company, less total liabilities,
divided by the number of shares of Common Stock outstanding. Assuming the
receipt by the Company of the net proceeds from the sale of the Representatives'
Warrant and the 1,200,000 shares of Common Stock offered by the Company at an
assumed public offering price of $6.50 per share after deducting underwriting
discounts and commissions and estimated offering expenses, the net tangible book
value of the Company as of September 30, 1998 would have been $8,808,379, or
$.97 per share. This represents an immediate increase in the net tangible book
value of $.63 per share to existing stockholders of the Company and an immediate
dilution of $5.53 per share to new investors purchasing Common Stock in this
Offering. The following table illustrates the per share dilution to be incurred
by new investors as of September 30, 1998:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price....................... $6.50
Net tangible book value per share at September 30, 1998... $.34
Increase per share attributable to new investors.......... .63
----
Net tangible book value per share after the Offering........ .97
-----
Dilution per share to new investors......................... $5.53
=====
</TABLE>
The following table sets forth, as of September 30, 1998, the number of
shares of Common Stock purchased from the Company, the total consideration paid
to the Company and the average price per share paid by existing stockholders and
by the investors purchasing shares of Common Stock offered hereby (assuming a
public offering price of $6.50 per share):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 7,870,574 86.8% $ 4,811,078 38.1% $ .61
New investors.................. 1,200,000 13.2% 7,800,000 61.9% $6.50
--------- ----- ----------- -----
Total................ 9,070,574 100.0% $12,611,078 100.0%
========= ===== =========== =====
</TABLE>
The above information excludes 655,569 shares of Common Stock reserved for
issuance upon the exercise of outstanding stock options as of November 3, 1998
at a weighted average exercise price of $4.06 per share and 160,000 shares of
Common Stock reserved for issuance upon the exercise of the Representatives'
Warrant. To the extent that such options and warrant are exercised, there will
be further dilution to new investors. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and Note 7 of Notes to the
Financial Statements.
20
<PAGE> 23
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following data, insofar as it relates to the years 1994 through 1997,
has been derived from annual Financial Statements and Notes thereto, some of
which appear elsewhere herein. The selected balance sheet data as of December
31, 1996 and 1997, and the selected statement of operations data for the three
fiscal years ended December 31, 1997, are derived from the Company's Financial
Statements which have been audited by Wolf & Company, P.C., independent
certified public accountants, whose report appears elsewhere herein. The
selected financial data presented below at September 30, 1998 and for the nine
months ended September 30, 1997 and September 30, 1998 have been derived from,
and are qualified by reference to, the Company's unaudited Financial Statements
also appearing herein. Such unaudited Financial Statements, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the results for the unaudited interim
periods. The data should be read in conjunction with the Financial Statements
and the Notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing elsewhere in this Prospectus. In
1998, the Company shifted its primary business focus from software consulting to
product development, marketing and sales. As a consequence, the Company expects
that the substantial majority of its future revenues will be derived from sales
of its software robot products and that revenues from its consulting business
will significantly decrease. Accordingly, past financial results do not reflect
the results of the Company's current business activities. Furthermore, its
limited operating history leads the Company to believe that period-to-period
comparisons of its operating results are not meaningful and that the results for
any period should not be relied upon as an indication of future performance. See
"Risk Factors -- Minimal Revenues and Recent Losses; Period to Period
Comparisons; Limited Operating History; Anticipation of Continued Losses."
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------- -----------------
1994(1) 1995 1996 1997 1997 1998
------- ------ ------ ------ ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Application services......................... $ -- $1,217 $2,790 $1,347 $1,292 $ 332
Other........................................ -- -- -- 423 117 117
------ ------ ------ ------ ------ -------
Total revenues........................ -- 1,217 2,790 1,770 1,409 449
------ ------ ------ ------ ------ -------
Operating expenses:
Selling, general and administrative.......... 22 967 1,101 1,049 859 1,078
Engineering.................................. -- 828 656 512 389 309
Research and development..................... -- -- -- -- -- 274
Depreciation and amortization................ -- 40 138 168 125 77
------ ------ ------ ------ ------ -------
Total operating expenses.............. 22 1,835 1,895 1,729 1,373 1,738
------ ------ ------ ------ ------ -------
Income (loss) from operations......... (22) (618) 895 41 36 (1,289)
Other income(expense)........................ -- (35) (15) (11) (10) (20)
------ ------ ------ ------ ------ -------
Income (loss) before tax.............. (22) (653) 880 30 26 (1,309)
Provision (benefit) for income taxes......... -- (257) 337 9 8 --
------ ------ ------ ------ ------ -------
Net income (loss)..................... $ (22) $ (396) $ 543 $ 21 $ 18 $(1,309)
====== ====== ====== ====== ====== =======
Net income (loss) per share(2)................. $ (.02) $ (.07) $ .08 $ .00 $ .00 $ (.19)
Shares used in computing net income (loss) per
share(2)..................................... 1,393 5,574 6,967 6,967 6,967 7,013
</TABLE>
21
<PAGE> 24
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30, 1998
---------------------------------- -------------------------
1994(1) 1995 1996 1997 ACTUAL AS ADJUSTED(3)
------- ------ ------ ------ ------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash.......................................... $43 $ 23 $ 30 $ 22 $2,606 $ 8,754
Working capital (deficit)..................... 28 (565) 74 167 2,467 8,615
Total assets.................................. 43 760 885 1085 3,515 9,542
Long-term debt................................ -- -- -- -- 500 500
Total stockholders' equity.................... 28 82 625 646 2,660 8,808
</TABLE>
- ---------------
(1) Initial period of operations from November 15, 1994 to December 31, 1994.
(2) Net income (loss) per share is determined by dividing the net income (loss)
attributable to common stockholders by the weighted average number of Common
Stock and Common Stock equivalents outstanding during the period. See Note 2
of Notes to Financial Statements.
(3) As adjusted to give effect to the sale of the 1,200,000 shares of Common
Stock offered hereby, after deducting the underwriting discount and the
offering expenses, at an assumed initial public price of $6.50 per share and
the application of the estimated net proceeds therefrom as set forth in "Use
of Proceeds."
22
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements, including the Notes thereto, of the Company included elsewhere in
this Prospectus. This Prospectus contains forward-looking statements.
Prospective investors are cautioned that any such forward-looking statements are
not guarantees of future performance and involve risks and uncertainties. Actual
events or results may differ materially from those discussed in the
forward-looking statements as a result of various factors, including the matters
set forth in the "Overview" section hereof and in "Risk Factors."
OVERVIEW
The Company was incorporated in Delaware in November 1994 as Neurotec
International Corp., a wholly-owned subsidiary of Neurotec Hochtechnologie GmbH
("Neurotec GmbH"), a German multimedia and Internet solutions company owned by
Eberhard Schoneburg, Artificial Life's President, Chief Executive Officer and
Chairman, and two corporate investors: a major German retailer and an industrial
conglomerate. In July 1997, Mr. Schoneburg sold all of his shares of Neurotec
GmbH to the two remaining stockholders and contemporaneously purchased 100% of
the shares of Neurotec International Corp. (the "Management Buyout"). In August
1997, the Company changed its name to Artificial Life, Inc. Following the
Management Buyout, the Company's management made the strategic decision to shift
the Company's primary business focus from providing software consulting services
to developing, marketing and supporting its Alife suite of SmartBot software
products.
Management's decision to shift the primary business focus of the Company
from software consulting to product development and commercialization has had
and will likely continue to have an adverse effect on the Company's results of
operations in the near term. The Company expects that an increasing percentage
of its future revenues will be derived from sales and services associated with
its SmartBot software products and that revenues from its consulting business,
as a percentage of gross revenues, will significantly decrease over time. To
date, the Company's major source of revenue has been derived from its software
consulting services, and it has generated no revenue from the sale of its
SmartBot software products. The Company is currently expanding its research and
development, production and marketing capabilities associated with the
anticipated sale of its SmartBot products, and as a result, operating expenses
are expected to increase significantly going forward. The Company expects to
continue to incur increasing losses and generate negative cash flow from
operations until at least the year 2000. To the extent that the Company's
product development, marketing and sales efforts do not result in commercially
successful products that generate significant net revenues, the Company will be
materially adversely affected. There can be no assurance that the Company will
ever generate sufficient revenues from the sale of the Company's products or
associated services to achieve or maintain profitability.
In addition, as a result of the Company's recent transition in its primary
business focus from software consulting to product development, marketing and
support, the Company's research and development expenditures increased to
$274,045 for the nine months ended September 30, 1998 from zero for the same
period in 1997. This increase is due to the fact that prior to 1998, all
research and development expenditures were related to consulting services for
which the Company was reimbursed by its customers and thus, such expenditures
are included in engineering expenses in the Company's financial statements
through December 31, 1997. Conversely, during 1998, due to the Company's shift
in business focus, the Company had most of its employees engaged in the research
and development of its SmartBot products.
Because the Company has shifted its primary business focus from software
consulting to product development, marketing and support, results of operations
to date are not reflective of the Company's business prospects going forward.
Moreover, the Company expects to experience significant fluctuations in its
future operating results due to a variety of factors. Factors that may
23
<PAGE> 26
affect the Company's operating results include the success of product
development, the amount of software consulting undertaken in the future, market
acceptance of the Company's products, frequency and timeliness of new product
releases, success of strategic alliances, the mix of product and service sales,
the Company's response to competitive pressure and its ability to attract and
retain qualified personnel. Gross profit margins will vary from product to
product and between products and services and although the Company may have some
ability to affect its products and services mix, the Company's sales mix may
vary from period to period and its gross margins will fluctuate accordingly.
RESULTS OF OPERATIONS
The Company's principal source of revenue from inception through May 1998
has been software consulting services. From inception through June 1997, the
preponderance of those revenues were generated by subcontracts issued from
Artificial Life's former parent company. Of the non-related party revenues, most
were derived from the Company's long-term consulting contract with its major
domestic client. This consulting contract started in late 1996 and concluded in
May 1998.
During the fourth quarter of 1997, the Company began evaluating the
addition of software product development to its core business of providing
software consulting services. The Company commenced software development plans
while it continued to provide software consulting services under its existing
contracts and to seek new consulting contracts. In the first quarter of 1998,
the Company began software development activities while continuing to service
its one existing consulting contract. During this time the Company limited its
efforts in seeking new consulting contracts as it began to shift its primary
business focus to software development. During the second quarter of 1998, when
the Company's major domestic consulting contract ended, the Company focused a
substantial portion of its available resources on product development. To date,
the Company has not released any commercial versions of its SmartBot products
for sale.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1997
Revenues: Revenues for the nine months ended September 30, 1998 were
$449,380 as compared to $1,409,068 for the same period of the prior year. The
decrease of $959,688, or 68.1%, resulted from the termination of sales to its
former parent in 1997 and the Company's decision beginning in the fourth quarter
of 1997 to transition its primary business focus from software consulting to
product development, sales and services.
Engineering Expenses: Engineering expenses generally consist of salary and
payroll tax expenses, training, consulting, subcontracting and other expenses
incurred to develop and fulfill the engineering requirements of the products and
services from which the Company derives its revenues. Engineering expenses for
the nine months ended September 30, 1998 were $308,897 as compared to $388,426
for the same period of the prior year. The decrease of $75,529, or 20.5%, was
directly attributable to the reallocation of resources to research and
development as a result of the Company's decision beginning in the fourth
quarter of 1997 to transition its primary business focus from software
consulting to product development, marketing, sales and services.
Research and Development Expenses: Research and development expenses
consist of expenses similar in nature to engineering expenses except that such
expenses typically relate to new products and activities that will generate
revenue at some future date. Research and development expenses for the nine
months ended September 30, 1998 were $274,045. Prior to 1998, substantially all
research and development was performed by the Company in connection with
contractual consulting arrangements with its customers, for which it was
reimbursed. Such costs were included in engineering expenses. Upon conclusion of
its long-term consulting contract in May 1998, the Company focused essentially
all available resources on product development. Accordingly, the Company expects
that research and development expenditures will continue to rise significantly
in
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<PAGE> 27
the foreseeable future as the Company expands its research and development
capabilities relating to such product development.
Selling, General and Administrative Expenses: Selling expenses consist of
salary and payroll tax expenses of marketing personnel and costs relating to
marketing materials, promotional videos, advertising and public relations
activities. General and administrative expenses consist of salary of
administrative personnel, rent, legal and accounting fees and costs associated
with employee benefits, supplies, communications and travel. Selling, general
and administrative expenses for the nine months ended September 30, 1998 were
$1,078,004 as compared to $859,220 for the same period of the prior year. The
increase of $218,784, or 25.5%, was directly attributable to ramping up its
marketing and sales resources. Increased costs include public relations fees
($61,475), amortized costs of promotional corporate videos ($13,568) and travel
and entertainment ($56,537).
Net Loss: The net loss for the nine months ended September 30, 1998 was
$1,309,097 as compared to net income of $18,077 for the same period of the prior
year. This decrease was directly related to the decrease in software consulting
revenues related to the Company's transition to product development, marketing,
sales and services beginning in the fourth quarter of 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues: Revenues for the year ended December 31, 1997 were $1,770,360 as
compared to $2,789,878 for the year ended December 31, 1996. The decrease of
$1,019,518, or 36.5%, is directly attributable to the Company's discontinuing
software consulting work for its former parent after the Management Buyout.
Engineering Expenses: Engineering expenses for the year ended December 31,
1997 were $512,267 as compared to $656,086 for the year ended December 31, 1996.
The decrease of $143,819, or 21.9%, resulted primarily from the Company's
discontinuing software consulting work for its former parent after the
Management Buyout and the shift in its primary business focus away from software
consulting. While engineering expenses decreased in absolute dollars in 1997 as
compared to 1996, such expenses increased as a percentage of revenues to 28.9%
in 1997 from 23.5% in 1996. This percentage increase was primarily a result of
decreased revenues due to the fact that in 1996 the Company was engaged solely
in high margin consulting work whereas in 1997 the Company had begun to shift
its business focus from consulting to product development, marketing and
support.
Research and Development Expenses: Research and development expenses for
the year ended December 31, 1997 were related to contractual software consulting
services for which the Company was reimbursed and were included in engineering
expenses.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses for the year ended December 31, 1997 were $1,048,897 as
compared to $1,101,109 for the year ended December 31, 1996. The decrease of
$52,212, or 4.7%, is attributable to reduced sales and marketing overhead
associated with the Company's reduction in contractual software consulting
services.
Net Income: Net income for the year ended December 31, 1997 was $21,065 as
compared to $543,344 for the year ended December 31, 1996. The decrease of
$522,279, or 96.1%, is attributable to the Company's discontinuation of
contractual consulting services for its former parent and the transition of its
primary business focus away from software consulting. The Company had total
revenues from its former parent and affiliates of $1,054,115, including
cancellation fee income of $189,938, in 1997 compared to $2,542,642 for 1996.
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YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues: Revenues for the year ended December 31, 1996 were $2,789,878 as
compared to $1,216,716 for the year ended December 31, 1995. The increase of
$1,573,162, or 129.3%, was principally attributable to the performance of
software consulting services for its former parent and other affiliates, and the
initial revenues realized from the Company's major domestic software consulting
contract. The Company had sales to its former parent and affiliates of
$2,542,642 in 1996 compared to $1,216,716 for 1995 and received initial revenues
from its major domestic consulting contract of $247,236 in 1996.
Engineering Expenses: Engineering expenses for the year ended December 31,
1996 were $656,086 as compared to $827,471 for the year ended December 31, 1995.
The decrease of $171,385, or 20.7%, was directly attributable to reduced
engineering charges from the Company's former parent as the Company's in-house
engineering staff was in place and operational. Engineering expenses as a
percentage of revenues decreased to 23.5% in 1996 from 68.0% in 1995. This
percentage decrease was due to the fact that substantially all engineering
charges in 1995 were in the form of charges from the Company's former parent and
outside contractors which were at significantly higher rates than those
generated by the Company internally in 1996.
Research and Development Expenses: Research and development expenses for
the year ended December 31, 1996 related to contractual software consulting
services for which the Company was reimbursed and were included in engineering
expenses.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses for the year ended December 31, 1996 were $1,101,109 as
compared to $967,271 for the year ended December 31, 1995. The increase of
$133,838, or 13.8%, represented the addition of a Director of Sales and
Marketing along with related staff ($60,124), additional administrative support
staff ($45,070), increased office overhead and increased travel and consulting
costs. These increases were offset in part by the elimination of one-time start
up costs incurred in 1995.
Net Income: Net income for the year ended December 31, 1996 was $543,344
as compared to a net loss of $395,856 for the year ended December 31, 1995. The
increase in earnings of $939,200, or 237.3%, was related to several factors.
First, approximately $282,000, or 71.2%, of the 1995 net loss was related to
start-up costs that were expensed in that period. Second, outside charges for
engineering expenses from the Company's former parent and independent
consultants were reduced significantly in 1996 to $49,349 from $472,027 for 1995
as the Company's engineering team was in place and operational. Finally, because
the administrative infrastructure was already established in 1995, there were
limited additional costs required to manage the Company's business in 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company had cash and cash equivalents of
$2,606,195. From inception through the year ended December 31, 1997, the Company
funded its operations primarily through initial equity investments in 1994 and
1995 totaling $500,000 and net income from operations. Subsequent to 1997, the
Company incurred operating losses in connection with its transition from
software consulting to product development, marketing and sales. These losses
are expected to increase and have been funded to date by a long-term stockholder
loan of $500,000 and a private placement of Non-Voting Common Stock of $181,367,
the net proceeds of which the Company received in June 1998. In September 1998,
the Company raised $4,034,247 in net proceeds from a private placement of
824,000 shares of Voting Common Stock. As of September 30, 1998, $895,000 was
still to be received. The Company's requirements for additional capital will
depend on many factors, including but not limited to the progress and costs
associated with its research and development activities, production costs and
sales, marketing and promotional
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programs, establishment of foreign operations and the levels of revenues
achieved through the sale of its SmartBot suite of products. The Company has
currently placed excess funds in interest bearing vehicles such as money market
accounts and certificates of deposit.
Effective October 10, 1995, the Company entered into a consortium agreement
(the "MIT Agreement") with the Massachusetts Institute of Technology ("MIT").
Under the MIT Agreement, MIT will conduct research projects for the "Things That
Think Consortium." The term of the agreement is for five years through October
9, 2000 but provides for early termination, with one year written notice, as
well as renewal options. The Company is obligated to pay an annual membership
fee of $125,000 under the MIT Agreement.
The Company leases office and other space and various office equipment
under various noncancelable leases. Minimum annual lease payments, exclusive of
additional operating costs, for the years ended December 31, 1998, 1999, 2000
and 2001 are $221,372, $205,725, $205,352 and $17,113, respectively.
The Company has employment agreements with certain corporate officers. The
agreements are generally one to three years in length and provide for minimum
base salaries. These agreements include severance payments under certain
conditions of approximately 50% to 300% of each officer's annual compensation.
In addition the President, Chief Executive Officer and Chairman of the Company
is entitled to receive an annual incentive bonus of 3% of the Company's profits
from operations. See "Management -- Executive Employment Agreements."
In October, 1998 the Company transferred to an escrow account in
Switzerland approximately $390,000 for the establishment of its European
headquarters in Luzern, Switzerland. Also, the Company plans to establish in the
near term a research and development subsidiary in the Russian Republic for
which it will incur start-up expenses.
The Company is presently in preliminary discussions with two potential
joint venture partners regarding the establishment of e-commerce and Internet
banking joint ventures in 1999. If the Company were to successfully conclude
agreements with each of these parties, the Company might allocate up to $2.5
million of the proceeds of this Offering to the purchase of minority interests
in such joint ventures. To date, the parties have not reached any understanding
or agreement in connection with such joint ventures. There can be no assurance
that either proposed joint venture will be consummated. See
"Business -- Strategic Alliances and Joint Ventures."
The Company believes that the net proceeds of this Offering, together with
its current cash and cash equivalents, and other cash generated from operations
will enable the Company to maintain its current and planned operations at least
through July 2000, although there can be no assurance that the Company will not
have additional capital needs prior to such time. If cash generated from
operations is insufficient to satisfy the Company's liquidity requirements after
that time, the Company may seek to sell additional equity or debt securities or
obtain a credit facility. The sale of additional equity or convertible debt
securities could result in additional dilution to the Company's stockholders.
There can be no assurance that financing will be available in amounts or on
terms acceptable to the Company, if at all. See "Risk Factors-Need for
Additional Capital."
The Company has incurred interim losses through September 1998, and the
Company anticipates a loss for income tax purposes for fiscal 1998. This loss
will be available to carry forward and reduce income taxes, if any, in future
periods.
YEAR 2000
The Year 2000 issue is the result of computer programs using a two-digit
format, as opposed to four digits, to indicate the year. Any of the Company's
computer programs or other information systems that have time-sensitive software
or embedded microcontrollers may recognize a date using "00" as the year 1900
rather than the Year 2000. This could result in a system failure or
miscalculations causing disruptions of operations.
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The Company has completed an initial, though not necessarily final, review
of its information and non-information technology systems. This initial review,
the costs of which were not material, included its existing and planned computer
software and hardware. The Company believes that these systems are Year 2000
compliant and has made an initial determination that the costs and/or
consequences associated with the Year 2000 issue are not expected to have a
material adverse effect on its business operations or future financial
condition. The Company, however, will continue to monitor the Year 2000
readiness of these systems and will take additional review or remedial action if
it deems it necessary to do so. During the remainder of 1998 and 1999, the
Company will evaluate the need to complete a further review, which may include
soliciting and obtaining certification of Year 2000 compliance from certain
third party software vendors and determining the readiness of its significant
suppliers and customers. At this time, however, the Company does not have a
specific plan for further review, assessing third party vendor systems,
assessing the readiness of significant suppliers and customers, or taking
remedial action, nor does the Company know the amount or material nature of
expenditures it may incur in doing so. Nevertheless, the Company does not
currently expect to experience Year 2000 problems as its computer hardware is
generally no more than two years old and it has the latest version of computer
software programs.
In addition, the Company's products are designed to operate with third
party software and data. The operation of the Company's existing and proposed
products will be adversely affected if such third party software and data are
not Year 2000 compliant or if such third parties have not used compatible
technology in achieving compliance. The Company at this time does not have
specific plans for determining the Year 2000 readiness of third party software
and data.
To the extent that the Company's assessment is completed without
identifying any non-compliant systems operated by the Company or by third
parties, the Year 2000 issue could have a material effect on the operations of
the Company. The Company could experience delays in the development of its
products. Once its products are developed and offered for commercial sale, the
Company could experience delays in delivering such products or could deliver
products that do not operate correctly, which could cause the Company to lose
business and even customers and could subject the Company to claims for damages.
Problems with the Year 2000 issue could also result in delays in the Company
invoicing its customers or in the Company receiving payments from them. The
severity of these possible problems would depend on the nature of the problem
and how quickly it could be corrected or an alternative implemented, which is
unknown at this time.
After completing any additional assessment, the Company plans to develop
during 1999 appropriate contingency plans to address situations in which various
systems of the Company, or of third-parties with which the Company does
business, are not Year 2000 compliant. Some risks of the Year 2000 issue,
however, are beyond the control of the Company and its suppliers and customers.
For example, no preparations or contingency plan will protect the Company from a
downturn in economic activity caused by the Year 2000 issue.
EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European
Union are scheduled to adopt a new currency called the "euro" as their common
legal currency (the "Euro Conversion"). The Company is currently unsure of the
potential impact that the Euro Conversion will have on its business, financial
condition and results of operations.
RECENT PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." This statement establishes standards for the reporting
and display of comprehensive income and its components in a full set of general
purpose financial statements. Comprehensive income generally represents all
changes in stockholders' equity during the period except those resulting from
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investments by, or distributions to, stockholders. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997 and requires restatement of
earlier periods presented. SFAS No. 130 had no impact on the Company's financial
statements.
In June 1997, FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
way that a public enterprise reports information about operating segments in
annual financial statements, and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
stockholders. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997 and requires restatement of earlier periods presented.
Management is currently evaluating the requirements of SFAS No. 131.
In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
(SOP) No. 97-2, "Software Revenue Recognition." SOP 97-2 provides guidance on
when revenue should be recognized and in what amounts for licensing, selling,
leasing or otherwise marketing computer software. SOP 97-2 is effective for
transactions entered into in fiscal years beginning after December 15, 1997. SOP
97-2 had no impact on the Company's Financial Statements.
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BUSINESS
OVERVIEW
Artificial Life, Inc. ("Artificial Life" or the "Company") develops,
markets and supports "intelligent" software robots ("bots"). The Company's bots,
known as "SmartBots," are software programs that the Company is developing to
automate and simplify time-consuming and complex business-related Internet
functions such as Web navigation, direct marketing, user profiling, information
gathering, messaging, knowledge management, sales response and call center
automation. The Company is also developing products for applications in data
mining, Web-page analysis, statistical analysis and direct marketing to support
the functionality of the SmartBot products. While each Artificial Life SmartBot
will function independently and will be programmed for a particular application,
customers will be able to combine the SmartBots to create what the Company
believes will be the industry's first integrated commercial, robot-based
electronic commerce ("e-commerce") solution. In addition, the Company provides
software consulting services to corporations and other entities seeking software
solutions, particularly in the field of "intelligent" software programs.
The rapidly increasing number of Web users and ubiquitous access to the
Internet, both in the United States and internationally, have resulted in the
emergence of the Internet as a new mass medium through which persons and
entities gather information, communicate, market and sell products and services,
interact and seek entertainment. However, the Company believes that the
Internet's success has also made it increasingly difficult for Internet users to
search for and locate information relevant to their interests and for companies
engaged in selling goods and services over the Internet to effectively market
and support their products and services. Artificial Life is developing its
family of SmartBot products to help address these needs.
The Company's SmartBot products are being designed to communicate in
natural language and to respond "intelligently" to a user's command or inquiry,
and in some cases, to act autonomously. All of the Company's SmartBot products
are based on the Company's Alife-SmartEngine technology. The Alife-SmartEngine
is the core component that gives the Company's products the ability to converse
with its users in natural language, either by text or speech, and also to
process and respond to natural language commands or questions. The
Alife-SmartEngine contains several "intelligent" modules that process and
interpret manually input or verbal natural language. These modules work together
to break down the essential components of human conversation -- detailed
knowledge of certain topics, casual talk about topics of interest ("small
talk"), short and long term memory of previously discussed topics, and some
emotional content and intentions that drive the conversation -- and use these
components to "understand" and respond to the user in a manner that is more
human-like and less machine-like than current "query-based" software. The
Company believes that its products will allow people to interact with computers
in a more natural way -- similar to a conversation with a human being.
The Company believes that "intelligent" software products represent an
emerging standard in the way individuals and businesses will retrieve, present
and manipulate information on the Internet. The advent of graphical user
interfaces and window-based operating systems created a new personal computing
standard and led to significantly increased computer use because they made
computers easier to use. Users no longer had to engage in the time consuming
task of learning and accurately executing textual operating commands. Instead, a
generation of computer users operated their computers by pointing and clicking
with a "mouse." The Company believes that the introduction and adoption of
"intelligent" software programs like its SmartBots will make the Internet easier
to use through natural language communication and by freeing users from much of
the time needed to manually search for data on the Internet and then to
manipulate such data for the user's desired purpose.
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The Company released its first SmartBot product, the non-commercial version
of the Alife-WebGuide, in September 1998. To date, the Company has not sold any
SmartBot products but expects to commence sale of the "Professional" version of
the Alife-WebGuide in the fourth quarter of 1998 and the "Enterprise" version in
the first quarter of 1999. The Company is presently developing the initial
versions of the seven SmartBot products listed below:
- ALIFE-WEBGUIDE: This SmartBot is designed to reside on a Web site and
help users navigate the site by accepting and processing questions, such
as search queries, from users in natural language and responding to users
in natural language. The bot engages the user in a "conversation" through
questions and answers and, upon learning of the user's interests, is
designed to display Web pages that match the content of the
"conversation" or to suggest links to other locations on the Web site.
- ALIFE-SALESREP: The Alife-SalesRep is being designed for e-commerce
retailers to use for one-to-one marketing on the Internet. Retailers will
input user profile information and product information into this
SmartBot's Knowledge Bases to deliver customer-specific, targeted sales
information via the Internet.
- ALIFE-MESSENGER: The Alife-Messenger is being designed to act as a
natural language-based automated e-mail reply and answering service. By
customizing the Alife-Messenger, a company can automate replies to
incoming e-mail queries and customer requests, thereby reducing the need
for human intermediaries.
- ALIFE-PORTFOLIO-MANAGER: This SmartBot is being developed to monitor, in
real-time, an individual's investment portfolio using criteria
established by the individual and, when such criteria have been met, or
failed to have been met, to autonomously in real-time contact the
individual by telephone, pager, e-mail or some other mode of
communication and let the individual know that trading action might be
warranted.
- ALIFE-CALL-CENTER-AGENT: The Alife-Call-Center-Agent is being designed
for call centers and help desks to be integrated with existing call
center server software to provide an automated first response to incoming
voice telephone calls or e-mail requests and to handle call center
requirements with virtually no aid from human operators.
- ALIFE-KNOWLEDGE-MANAGER: This SmartBot is being designed to extract
information contained in a company's Intranet documents, organize it and
make it more easily accessible for retrieval in order to enable companies
to more efficiently and intelligently manage the large amount of data and
documents that companies are making available on their Intranets.
- ALIFE-PERSONAL-TUTOR: The Alife-Personal-Tutor is a tutoring program
being designed to extract profile information from natural language
conversation between the bot and the student user and to automatically
adapt the difficulty and content of the lessons to the skill level of the
student based on this information.
The Company plans to offer a fully-functional "Personal" version of most of
its products to non-commercial users either free or at a low price. The Company
believes that this approach, which has been used successfully by other Internet
companies, will result in more rapid acceptance and sales of the Company's
products to commercial users. The commercial versions of the SmartBot will
include a "Professional" version for professional and small corporate users
and/or a transaction and client/server based "Enterprise" version for networked
corporate users. For the commercial versions of its SmartBot products, the
Company intends to charge a one-time licensing fee, and with respect to the
"Enterprise" version, intends to also charge a transactional fee based upon the
number of users which interact with its bots. The Company develops its SmartBot
products on widely available standard hardware and software platforms such as
Windows NT/95/98 and Internet browsers such as the Netscape
Navigator/Communicator and Microsoft Internet Explorer. The Company also expects
to offer some of the products for Unix and MacIntosh computers in the future.
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INDUSTRY BACKGROUND
Computer users and businesses have rapidly adopted the Internet as a means
to gather information, communicate, transact business, interact and be
entertained, making it an important new mass medium. International Data
Corporation ("IDC"), a market research firm, estimates that the number of
Internet users exceeded 69 million in 1997, and will grow to over 320 million by
2002. The Internet enables advertisers to target advertising campaigns utilizing
sophisticated databases of information about the users of various sites and to
directly generate revenues from these users through online transactions. As a
result, the Internet has become a compelling means to advertise and market
products and services. IDC estimates that the total value of goods and services
purchased over the Internet will grow from $12 billion in 1997 to approximately
$425 billion per year by the end of 2002.
Consequently, the amount of information available on the Internet has grown
dramatically. Web sites have proliferated along with the data available on such
sites, making it more difficult and time consuming for users to find the
information they want. Users are spending a substantial portion of their on-line
time searching for the specific information, products or services they desire.
Furthermore, once an Internet user locates a desired site or sites, the user
often finds it difficult to navigate such sites. As Web technology has improved,
many Web sites have become more complex by adding new features, products,
services, chat rooms, games, and other services. It is not uncommon for one Web
site to have dozens of different options and links to other associated sites.
While it is generally true that this increase in information and choices
benefits Web users, more effective tools are needed to find information,
products and services efficiently.
For corporations offering products and services on the Internet, the
rapidly increasing number of Internet users offers benefits but also presents
challenges. For example, a company may place a description of a new product on
its Web site and then find that within a few hours, thousands of Internet users
have sent e-mail messages to learn more about the product. While the volume of
inquiries suggests that the company might ultimately generate significant
revenues from selling its new product online, responding to each of these
inquiries in a timely manner can require an expensive customer service force. A
second problem facing e-commerce companies is the dramatic increase in
competition among e-commerce sites. Numerous e-commerce sites are launched
worldwide on the Internet daily. Accordingly, e-commerce retailers must find
increasingly efficient and cost-effective ways to market their products and
services to new customers and maintain or enhance existing customer
relationships.
THE ARTIFICIAL LIFE SOLUTION
Artificial Life is developing its Alife suite of SmartBot products to
assist in solving problems relating to information retrieval, Web navigation,
sales and service support and direct marketing on the Internet. These software
robots are designed to communicate in natural language and to respond
"intelligently" to the user's command or inquiry, and in some cases, to act
autonomously.
All of the Company's SmartBot products are based on the Company's
Alife-SmartEngine technology. The Alife-SmartEngine is the core component that
gives the Company's products the ability to converse with its users in natural
language, either by text or speech, and also to process and respond to natural
language commands or questions. The Alife-SmartEngine contains several
"intelligent" modules that process and interpret manual input or verbal natural
language. These modules work together to break down the essential components of
human conversation -- detailed knowledge of certain topics, casual talk about
topics of interest ("small talk"), short and long term memory of previously
discussed topics, and some emotional content and intentions that drive the
conversation -- and use these components to "understand" and respond to the user
in a manner that is more human-like and less machine-like than current
"query-based" software. The Company believes that its products will allow people
to interact with computers in a more natural way -- similar to a conversation
with a human being.
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Historically, general natural language understanding and processing
software programs (often classified under the category "artificial
intelligence") have focused on understanding the meaning of a sentence in the
same way as a human would, so that the software program can react appropriately
to a spoken sentence or a sentence typed in at the keyboard. These programs have
had only limited success. The Alife-SmartEngine instead attempts to mimic
comprehension of a sentence by using complex pattern matching techniques to
determine the actual goals and intentions of the user. By "understanding" the
user's goals and intentions, Alife-SmartEngine-based products are being designed
to possess the ability to actively drive and maintain a conversation about
certain topics, and not merely react to the user.
The Alife-SmartEngine stores information in "Knowledge Bases," databases
which can be combined or exchanged to give the derived products differing sets
of expertise. Customers can add information to a Knowledge Base using a special
"Knowledge Capture Editor." The Alife-SmartEngine has several linked stages that
read spoken or text-based input and produce spoken or text-based output. When a
user types in text or speaks to the Alife-SmartEngine via standard voice
recognition software packages, the pre-processed speech input is routed to a
parser. The parser then converts the input from a stream of text to a series of
words and phrases. An analysis module draws on the topic information in the
memory section of the Alife-SmartEngine as well as the syntactic structure of
the sentence derived from the Knowledge Base. The major control module of the
Alife-SmartEngine is a meta-control module (the "Meta Controller") that is
essential for switching between the different speech processing modules to
process the input and prepare the appropriate response corresponding to a given
input. The Meta Controller picks a reply appropriate to the perceived intention
of the user by applying a set of rules that define the conversational strategy
of the bot. All modules communicate through the Meta Controller, which also
coordinates and balances the weighting of each of the separate modules as the
bot prepares its composite action.
Most of the Company's SmartBots communicate with the user through a
life-like three-dimensional graphical interface known as an "Avatar." Each
product comes with a standard human-like Avatar. However, the Avatar may be
customized by the customer, including using pre-existing branded icons or
displays. For instance, an e-commerce retailer of computer equipment might
customize its Avatar so that visitors to its Web site converse with a talking
computer. The Company believes that the use of an animated "talking partner"
allows people to interact with computers in a more natural and personal manner,
and that the ability of the Company's customers to customize the Avatars allows
them to develop or maintain brand or name recognition among visitors to a
customer's Web site.
PRODUCTS
The Company is currently developing seven basic software robots for use
individually or in various combinations. The Company presently intends to
develop three different product versions of most of its SmartBots: (i) a
"Personal" version intended for use by individual users on their personal Web
pages; (ii) a "Professional" version intended for use by professionals and small
businesses on their Web sites; and (iii) a transaction and client/server based
"Enterprise" version intended for use by large companies, institutions and
government agencies that want to integrate the bots into their existing
computing environment with enhanced and special customizable product features.
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The overall Alife product suite of SmartBots is represented by the diagram
below.
[SmartBots Flow Chart]
ALIFE-WEBGUIDE: The Company released the Personal version of this SmartBot
in September 1998. It is designed to reside on a Web site and help users
navigate the site by accepting and processing questions, such as search queries,
from users in natural language and responding to users in natural language. This
SmartBot engages the user in a "conversation" through questions and answers and,
upon learning of the user's interests, is designed to display Web pages that
match the content of the "conversation" or to suggest links to other locations
on the Web site. In an e-commerce application, the Alife-WebGuide can be
designed by the Web site host to function like a human sales associate at a
retail store, greeting customers coming through the door of the virtual store
and assisting them with advice and background information about products and
prices. This bot allows the use of a customizable animated Avatar interface.
Alife-WebGuide runs on both Netscape Navigator or Communicator 3.0 or
higher and Microsoft Internet Explorer 3.0 or higher. The Enterprise version of
the Alife-WebGuide is being designed with a client/server architecture,
requiring a Java virtual machine 1.02 or higher. The Knowledge Capture Tool and
the Statistical Tools of the Alife-WebGuide Professional and Enterprise version
are being designed to run on Microsoft Windows 95, 98 or NT. The Company
released the Personal version 1.0 of the Alife-WebGuide in September 1998 and
intends to release the Professional version 1.0 in the fourth quarter of 1998
and the Enterprise version 1.0 in the first quarter of 1999. The Company
believes that the potential market for this product includes Internet Web sites
which need or desire a more user-friendly natural language interface.
ALIFE-SALESREP: The Alife-SalesRep is being designed for e-commerce
retailers to use for one-to-one marketing on the Internet. Retailers will be
able to input user profile information and product information into this
SmartBot's Knowledge Bases to deliver customer-specific targeted sales
information on the Internet via e-mail. For example, the Alife-SalesRep can be
configured by a corporate user to utilize customer profile information to
deliver information about a specific sale or promotion to an existing or
potential customer. In this type of application, the user will typically have
the option of downloading the Alife-SalesRep Avatar to his or her computer. Once
the Avatar is resident on the user's computer, the user can access the
e-commerce retailer's Web site simply by clicking on the Avatar, which will
appear as an icon on the user's computer screen and which in many cases will
maintain a link to the host Web site.
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The Company is also designing Alife-SalesRep to engage in autonomous
action. For example, a user will download an Avatar, and the Avatar will
continue to appear on the user's start-up screen. Each time the user turns on
his computer, the Avatar, through its link to the host Web site, will
automatically download new information that the program has determined may be of
interest to the user, based upon the information in its Knowledge Bases. For
example, the user could learn from the Avatar resident on the computer that the
host company is having a sale on modems which run at faster speeds than the one
the user currently owns. The host company will have determined which modem the
user currently owns because the user had a "conversation" with the
ALife-SalesRep about the user's computer hardware. Later, the user might be
offered discounted tickets by the Avatar to an upcoming computer industry trade
show in the user's hometown at which the host will be exhibiting its products.
Alife-SalesRep is being designed to run on personal computers with
Microsoft Windows 95, 98 or NT. The Company intends to release the 1.0
Professional and Enterprise versions of Alife-SalesRep in 1999. The initial
target market for this product consists of advertising companies, companies with
direct Internet marketing activities and more generally all companies with
extensive Internet sales and marketing strategies and activities.
Although Alife-WebGuide and Alife-SalesRep are independent products, the
Company believes that potential customers will be best served by combining the
Alife-WebGuide and the Alife-SalesRep into an integrated one-to-one marketing
solution. The two products can be customized so that when a user communicates
with the Alife-WebGuide, a customer profile of the user containing the user's
interests and expectations would be generated by analyzing the natural language
communication log files generated by the Alife-WebGuide. This information would
then be used by Alife-SalesRep to initiate targeted marketing via e-mail to
contact the customer about specific product or service offerings. This
integrated one-to-one marketing solution is graphically depicted below:
[Alife-WebGuide Flow Chart]
ALIFE-MESSENGER: The Alife-Messenger is being designed to serve as a
natural language-based automated e-mail reply and answering service. By
customizing the Knowledge Bases of the Alife-Messenger, a company can automate
replies to incoming e-mail queries and customer requests. The Alife-Messenger is
being designed to work like an off-line Alife-WebGuide by selecting appropriate
answers to input queries in an "intelligent" way. However, instead of displaying
Web pages, the Alife-Messenger is being designed to automatically scan an
incoming e-mail for certain keywords and phrases, prepare a reply e-mail and
attach, as appropriate, additional information that matches what this SmartBot
determines might be useful to the user, such as relevant documents, price-lists,
and links to other Web sites. For an individual who purchases Alife-Messenger
for his Web page, it could be used as a customized e-mail "answering machine" on
the Internet. For a corporate purchaser already using Alife-SalesRep, the
Alife-Messenger could be configured to select the appropriate Alife-SalesRep to
be attached to the reply e-mails, with the goal of improving and supporting the
direct marketing channel.
The Alife-Messenger is being designed to support standard e-mail systems.
The Company intends to release the 1.0 version of the Alife-Messenger in the
first quarter of 1999. The Company
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intends to market this product to companies and institutions which need to
extensively interact with clients via e-mail or which have extensive
customer/client service programs using the Internet.
ALIFE-PORTFOLIO-MANAGER: The Alife-Portfolio-Manager is being developed to
monitor an individual's investment portfolio. The user can specify the desired
characteristics of his or her portfolio, such as particular stocks to own,
specific buy and sell thresholds for individual stocks, and desired ratios of
types of stocks. Once the user's portfolio guidelines are established, the
Alife-Portfolio-Manager will monitor the portfolio 24 hours per day and
autonomously notify the user when the user's price or ratio guidelines are not
being met through one of a variety of predefined media such as e-mail, telephone
or pager. In addition to monitoring existing investment portfolios, the Alife-
Portfolio-Manager is being designed to find other potential investments fitting
the user's specified criteria and notify the investor about any such investment
opportunities once found.
The Alife-Portfolio-Manager is being designed to run on personal computers
with Microsoft Windows 95, 98 or NT. The Company plans to release the 1.0
version of the Alife-Portfolio-Manager in the second quarter of 1999. The
Company believes that the market for this product will consist of individuals
and companies in the financial services industry, including Internet brokers, as
well as individual investors.
ALIFE-CALL-CENTER-AGENT: The Alife-Call-Center-Agent is being designed for
call centers and help desks to be integrated with existing call center server
software to provide an automated first response to incoming voice telephone
calls or e-mail requests and to handle the call center requirements virtually
unaided by human operators. The Alife-Call-Center-Agent is being designed to be
able to recognize voice input as well as text-based input such as e-mail.
However, the voice recognition capabilities of Alife-Call-Center-Agent will
depend to a large extent on the availability of highly accurate voice
recognition systems for telephones, which the Company does not develop or sell.
The Alife-Call-Center-Agent, like the Alife-Messenger, will analyze incoming
requests and prepare relevant responses, but will also interact and interface
with call center management, routing and accounting systems.
The Alife-Call-Center-Agent will require an operating platform with a Java
virtual machine. Additional software and hardware enhancements may be necessary
depending on the specific interfaces to call center operating systems. The
Company plans to release the 1.0 version of Alife-Call-Center-Agent by the end
of 1999. The Company intends to market this product directly to customers with
call centers and to call center software vendors. The following diagram
graphically depicts the operation of the ALife-Call-Center-Agent.
[Alife-Call Center Agent Flow Chart]
ALIFE-KNOWLEDGE-MANAGER: This SmartBot is being designed to extract
information contained in a company's Intranet documents, organize it and make it
more easily accessible for retrieval to enable companies to more efficiently and
intelligently manage the large amount of data and documents that companies are
making available on their Intranets. Alife-Knowledge-Manager can be configured
to allow each Intranet user to describe his own profile, background and
interests in addition to other information contained on the Intranet. Once so
configured, users can make natural language search queries about topics of
interest through the ALife-Knowledge-Manager, and the program will respond by
providing relevant information contained on the company's Intranet, including
information about other users with similar interests or areas of expertise.
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The Alife-Knowledge-Manager is being designed to run on standard OS
platforms and to provide for interfaces to standard databases and third party
document retrieval and management systems. The Company intends to release the
first versions of Alife-Knowledge-Manager in late 1999 or early 2000. The
Company plans to market this product primarily to large corporations with an
existing Intranet infrastructure.
ALIFE-PERSONAL-TUTOR: The Company is developing this SmartBot to address
certain limitations of traditional Computer-based Training ("CBT") and
Internet-based Training ("IBT") products that are currently available. Whereas
conventional CBT and IBT programs follow a pre-defined path of learning, the
Alife-Personal-Tutor is being designed to use student profile information
extracted from natural language conversation between the SmartBot and the
student user to automatically adapt the difficulty and content of the lessons to
the skill level of the student. Using the natural language capabilities of the
Alife-SmartEngine, students will be able to ask numerous questions about any
topic at any time in plain English. In addition, the Alife-Personal-Tutor is
being designed to respond to questions with additional explanatory multimedia
data (video and audio) depending on the context of the ongoing lecture between
the student and the Alife-Personal-Tutor. It will also formulate questions and
tests depending on the flow of the conversation and lesson.
The Alife-Personal-Tutor is being designed in two components and is
currently planned to be sold in two ways: (i) in several application packages
with specific content (such as science, history etc.), called "tutorials," and
(ii) as a generic tool for developing such tutorials. Both modules of the
Alife-Personal-Tutor are being designed to run on Windows 98 and NT (stand alone
versions) or on standard Internet browsers for on-line applications. The Company
intends to release the first tutorials in the first quarter of 1999 and the
generic version by the second quarter of 1999. The Company's target market for
this product is expected to be the CBT and IBT market and the general education
market.
CONSULTING AND PRODUCT SERVICES
The Company expects to provide consulting, maintenance, technical hotline
and support services for most or all of its products. The Company anticipates
that customers will require support for, and customized versions of, the
Company's SmartBot products or additional developments in order to tailor the
product to the customers' needs. In addition, the Company plans to provide
support for the creation and maintenance of the Knowledge Bases of its bots and
customer specific back-office tools for analyzing client profiles gathered by
its bots.
Historically, the Company has derived substantially all of its revenues
from software consulting services provided to a small number of customers.
During the year ended December 31, 1997, consulting services provided to the
Company's two largest customers, Neurotec Hochtechnologie GmbH (its former
parent company) and Passkey Systems, Inc., accounted for approximately 60% and
40% of the Company's total revenues, respectively. For the year ended December
31, 1996, services provided to Neurotec Hochtechnologie GmbH accounted for
approximately 91% of the Company's total revenues. For the year ended December
31, 1995, the Company derived all of its revenues from consulting services
provided to Neurotec Hochtechnologie GmbH. Although the Company has shifted its
primary business focus from software consulting to product development,
marketing and support, the Company anticipates that it will continue to derive a
portion of its revenues from software consulting projects. In particular, the
Company expects that it will provide software solutions for companies seeking
consulting expertise with agent-based software programs. In the near term, the
Company believes that a significant percentage of its revenues may be derived
from software consulting services.
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COMPANY STRATEGY
The Company's objective is to become a leader in the development and
implementation of commercial software robot-based solutions to solve various
issues confronting today's Internet use. To achieve this objective, the
Company's strategy includes the following key elements:
BUILD BRAND NAME RECOGNITION. The Company is seeking to achieve rapid and
broad adoption of its products and strong brand recognition. The Company will
seek to achieve this strategy by offering "Personal" versions of its products
for non-commercial use free of charge or at a low price. The Company also
intends to embark on an aggressive promotional campaign to increase awareness of
the Artificial Life brand and the Alife family of products. The promotional
campaign is expected to involve all common media (i.e. radio, television, print
and trade shows) with a particular emphasis on Internet channels.
CREATE MULTIPLE REVENUE STREAMS. The Company believes that its growing
product line, corporate customization, product Web sites and its future
installed user base will present a significant opportunity to develop and
maintain multiple revenue streams resulting from product sales, customization
and consulting, licensing fees and potentially in the future, advertising
revenues. As these different revenue streams mature, decisions will be made as
to the expansion and contraction of existing programs based on their success as
well as the introduction of new programs.
ESTABLISH STRATEGIC ALLIANCES. The Company intends to aggressively pursue
strategic alliances to gain access to complementary technologies and
distribution channels. The Company continually evaluates relationships with
companies that offer technologies complementary to the Company's SmartBot
products (such as speech integration and high-end graphics providers). The
Company intends to use alliances wherever possible to gain economies of scale
and to allow it to focus on its core strengths while using those of its partners
to add the complementary functionality necessary to increase value to users.
EXPAND GLOBALLY. The Company believes that significant opportunities exist
to capitalize on the growth of the Internet internationally. Because the Company
was once a subsidiary of a large and well-known German multimedia and Internet
solutions company, it already has significant contacts with a number of European
businesses. The Company believes that its products can be used worldwide, and
accordingly the Company intends to initiate an international program of
partnering and strategic investment to exploit cross-marketing, co-branding and
promotional opportunities.
LEVERAGE CUSTOMER BASE. The Company intends to cultivate its future
installed user base to gather feedback, test new product releases and create
customer loyalty. The Company plans to collect customer profile data (through
the use of a User Profile Form) for use in development of companion products and
services with the ultimate goal of developing a "community" of loyal users who
are familiar and comfortable with the Company's products. The Company plans to
allow individual users who fill out the User Profile Form to participate in beta
testing of products, information sessions, product and corporate announcements
and product focus chat forums. The Company believes that such communication,
participation and interaction will foster long-term customer loyalty. Several
types of incentives are planned to foster both the sharing of profile
information and the return of value for participation. These may take the form
of reduced user fees, if applicable, free software, contests and other
participatory programs.
EXPAND AND ENHANCE PRODUCT BASE AND TECHNOLOGY. The Company believes that
it must regularly provide new products and technologies and improve existing
ones to be successful. The Company's products utilize proprietary technologies,
including the Alife-SmartEngine. The Company's strategy is to continue to
enhance its existing technologies and develop new technologies that it can
incorporate into future product offerings. Because the Company's product lines
are being centered around core concepts and technology, the Company believes
many complementary products will be able to be developed by leveraging the
Company's existing competencies and experience into new ideas. Furthermore, the
Company believes that its overall strategy will allow it to address issues
regarding products and services in a dynamic, almost real-time basis, thereby
allowing rapid response to market feedback and developments.
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MARKETING AND SALES
The Company plans to offer an initial fully-functional "Personal" version
of most of its products to individual, non-commercial users either free of
charge or at a low price. The Company believes that this approach, which has
been used successfully by other Internet companies, will result in more rapid
acceptance and sale of the Company's products to commercial users: a
"Professional" version for professional and small corporate users and/or a
transaction and client/server based "Enterprise" version for networked corporate
users. For the commercial versions of its SmartBot products, the Company intends
to charge a one-time licensing fee and, with respect to the Enterprise version,
intends to also charge a transactional fee based upon the number of users which
interact with its bots. This strategy has been successful in the past for
companies such as Netscape, which distributed free versions of its browser
software, and RealNetworks, Inc., which has brought streaming audio and video to
the Internet.
The Company intends to sell the Alife-WebGuide, the Alife-Messenger and the
Alife-SalesRep via Company Web sites and through additional distribution
partners. The Company may decide to license the Professional and/or Enterprise
versions of these products for a certain period for free in order to generate
market penetration and increase demand for these commercial versions of the
Company's products.
The Company intends to enter into a strategic relationship with an
international partner already established in the call center market to market
and sell the Alife-Call-Center-Agent. The Company believes this will be
necessary because the call center software market is already highly competitive.
The Company intends to market and sell the Alife-Portfolio-Manager in
cooperation with one or more established companies in the financial services
industry and/or the online banking and trading community.
The Alife-Personal-Tutor and the Alife-Knowledge-Manager target the IBT/CBT
market and the Intranet and corporate market. Accordingly, the Company intends
to distribute and market these products in cooperation with partners with
established experience and sales channels in these growing business segments.
The Company has not entered into any such distribution or marketing
relationship, and there can be no assurance that it will be able to do so on
terms acceptable to it, or at all.
In addition to the marketing efforts for the individual products in the
Alife product suite, the Company intends to initiate marketing campaigns
beginning in the first half of 1999 to establish recognition of the Artificial
Life brand. The marketing activities are expected to involve all common media
(radio, TV, magazines, newspapers, trade shows) with a particular emphasis on
the Internet channels. The Company will use its own products like the
Alife-SalesRep and the Alife-WebGuide to promote its products and services.
The Company will also generate marketing material using its in-house
capabilities and multi-media know-how to produce video spots and innovative
interactive advertisement techniques for the Internet.
STRATEGIC ALLIANCES AND JOINT VENTURES
The Company is currently evaluating several strategic alliances with
companies in the United States and Europe for marketing and selling products as
well as for collaborations in product development. For example, the Company is
currently seeking to enter into a collaboration that will provide it with access
to speech recognition software to enable this aspect of its SmartBot products.
See "Risk Factors -- Dependence on Third Party Licensing." The closing of
collaboration agreements may influence future product development, the market
direction of certain products and the success of certain product marketing
efforts.
The Company is presently in preliminary discussions with an international
retailer regarding a possible joint venture in the field of e-commerce, pursuant
to which the Company would make an initial investment for a minority interest in
the joint venture. As part of the transaction, the Company
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would provide products and software consulting services to the joint venture and
receive payments therefor, and would also receive a percentage of the revenues
of the joint venture. If final specifications can be determined and definitive
agreements can be reached, activities associated with the potential joint
venture would commence in early 1999. To date, the parties have not reached an
understanding, nor have they entered into a letter of intent, memorandum of
understanding or any other agreement in connection with the joint venture.
The Company is also engaged in preliminary discussions with an
international financial institution regarding the establishment of a joint
venture in the field of Internet banking, pursuant to which the Company would
make an initial investment, with further investments to occur over a three-year
period, for a minority interest in the joint venture. As part of the
transaction, the Company would provide products and services to the joint
venture and receive payments therefor, and would also receive a percentage of
the revenues of the joint venture. To date, the parties have not reached an
understanding nor have they entered into a letter of intent, memorandum of
understanding or any other agreement in connection with the joint venture.
To date, the Company has not entered into any strategic alliance,
collaboration or joint venture, and there can be no assurance that it will be
able to do so on terms acceptable to the Company, or at all. See "-- Marketing
and Sales" and "Risk Factors -- Dependence on Third Party Licences."
PRODUCT DEVELOPMENT
The Company believes that strong development capabilities are essential to
its future performance and the maintenance of its competitive position. Since
its formation, the Company has primarily developed its technology and products
internally. The Company is exploring the opportunity to extend the functionality
of its Alife-SmartEngine-derived products through the inclusion of third party
software and applications in the development of such products.
The Company's development organization is arranged in four groups: the Core
Technology Group, which does research and designs and develops the technologies;
the Production Group, which specifies, produces and maintains product releases;
the Quality Assurance Group, which verifies that products meet their
specifications and the Company's quality standards; and the Competence Group,
which focuses on rapid prototyping of new ideas, consulting and adapting
customer specific versions of the products. The Company allocates
responsibilities among the groups to optimize the time, cost and quality control
issues associated with product development.
As of November 3, 1998, there were 20 employees on the Company's
development staff. The Company estimates that its total product development
expenses for its Alife-SmartEngine product suite will significantly increase
through 1998 and thereafter as it expects to allocate substantial resources to
future research and development. Through September 30, 1998, the Company had not
incurred any capitalized software development costs from its development
efforts. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
To the extent one or more of the Company's competitors introduce products
that more fully address customer requirements, the Company's business could be
materially adversely affected. There can be no assurance that the Company will
be successful in developing and marketing enhancements to its existing products
or new products, incorporating new technology on a timely basis, or that its new
products will adequately address the changing needs of the marketplace. If the
Company is unable to develop and introduce new products or enhancements to
existing products in a timely manner in response to changing market conditions
or customer requirements, the Company's business, prospects, financial condition
and results of operations will be materially adversely affected. See "Risk
Factors -- Rapid Technological Change."
COMPETITION
The market for the Company's products and services is new, evolving and
growing rapidly. Competition can be expected to intensify significantly as the
market matures and the more established software companies, such as Microsoft
Corporation, become increasingly involved.
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Barriers to entry are relatively insubstantial. The Company believes that the
principal competitive factors for companies seeking to become involved in the
software robot industry are core technology, delivery methods, brand
recognition, ease of use and interfaces.
The Company uses its core technology, the Alife-SmartEngine, in a wide
variety of business areas. Although the Company has not yet identified any
competitors in exactly the same areas in which it is active, there are companies
that have overlapping activities and therefore could be regarded as competition
to Artificial Life. Such firms include, among others: Autonomy, Inc.; Big
Science Company; Brightware, Inc.; Broadvision, Inc.; Digital Marketing
Concepts, Inc.; Extempo, Inc.; General Magic, Inc.; GK Intelligent Systems,
Inc.; Haptek, Inc.; Intellix A/S; Kinetoscope, Inc.; Microsoft Corporation;
Netsage Corp.; Neuromedia, Inc.; Nuance, Inc.; SRA International, Inc. and
Virtual Personalities, Inc. This list may not be complete and may change and
substantially increase over time.
Some of the Company's existing and potential competitors have longer
operating histories, greater name recognition, larger customer bases and
significantly greater financial, technical and marketing resources than the
Company. Such competitors are able to commit operating resources to product
development and enhancement, engage in more thorough marketing campaigns for
their products and services, be more aggressive from a pricing standpoint and
make more attractive offers to potential employees and partners.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company will be relying upon trade secrets, know-how, copyrights and
continuing technological innovations to develop and maintain its competitive
position. The Company seeks to protect such information, in part, by
confidentiality agreements with its corporate partners, collaborators, employees
and consultants. These agreements provide that all confidential information
developed or made known during the course of the individual's or entity's
relationship with the Company is to be kept confidential and not be disclosed to
third parties except in specific circumstances. The Company has caused each of
its employees to execute forms of Confidentiality and Inventions Agreements
which provide that, to the extent permitted by applicable law, all inventions
conceived by the individual during the individual's employment will remain the
exclusive property of the Company. There can be no assurance that these
agreements will not be breached, that the Company would have adequate remedies
for any breach, or that the Company's trade secrets will not otherwise become
known or be independently discovered by competitors. Further, there can be no
assurance that the Company will be able to protect its copyrights, trade secrets
or that others will not independently develop substantially equivalent
proprietary information and techniques.
The Company has no patents or patent applications pending, nor does it have
any registered copyrights. There can be no assurance that the existing or future
patents of third parties will not have an adverse effect on the ability of the
Company to continue to commercialize its products. Furthermore, there can be no
assurance that other companies will not independently develop similar products
or duplicate any of the Company's planned products or obtain patents that will
require the Company to alter its products or processes, pay licensing fees or
cease development of its planned products. See "Risk Factors -- Intellectual
Property and Other Proprietary Rights."
EMPLOYEES
As of November 3, 1998, the Company had 28 full-time employees and two
part-time interns. Of the Company's 28 full-time employees, 8 are involved in
sales, marketing and administrative functions and 20 are involved in research
and development. The Company will need to hire additional staff to accomplish
its business development goals. There can be no assurance that the Company will
be able to find, attract or retain such additional staff. See "Risk
Factors -- Dependence on Key Personnel; Need for Additional Personnel."
The Company's employees are not represented by any labor unions. The
Company considers its relations with its employees to be good.
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SUB-CONTRACTORS AND EXTERNAL HUMAN RESOURCES
To fulfill timely delivery of products, the Company is currently using
external human resources and sub-contractors to develop its products. There can
be no assurance that these external resources and sub-contractors will be
available in the future, or that the current conditions and agreements with
these contractors or resources will remain reasonable. See "Risk Factors --
Dependence on Third Party Contractors."
FACILITIES
The Company rents 7,334 square feet of office space at Four Copley Place,
Suite 102, Boston, Massachusetts 02116, USA. The 36 month lease commenced
February 1, 1998, at an annual rental of $205,332. The management of the Company
is aware of the fact that additional office space will be required in fiscal
1999 due to the planned expansion of the Company. The Company believes, however,
that it will be able to obtain any additional space in a timely manner and on
commercially reasonable terms.
LEGAL PROCEEDINGS
There are no material legal proceedings pending or, to the Company's
knowledge, threatened against the Company.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding the executive
officers and directors of the Company as of November 3, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Eberhard Schoneburg.................... 42 President, Chief Executive Officer and
Chairman of the Board
Bruno Gabriel.......................... 52 Director
Elmar Wohlgensinger(1)(2).............. 59 Director
Hartmut Bergmann(1)(2)................. 48 Director
Robert Pantano......................... 38 Chief Financial Officer
Klaus Kater............................ 31 Chief Technology Officer
</TABLE>
- ---------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Eberhard Schoneburg has been President and a member of the Board of
Directors of the Company since November 1994. He was Chief Executive Officer
from November 1994 to May 1996 and from October 1997 to the present. Mr.
Schoneburg has been the Chairman of the Board of Directors of the Company since
the founding of the Company. The Company was founded in November 1994 as
Neurotec International Corp., a wholly-owned subsidiary of Neurotec
Hochtechnologie GmbH ("Neurotec GmbH"), a German multimedia and Internet
solutions company owned by Mr. Schoneburg and two corporate investors: a major
German retailer and an industrial conglomerate. Neurotec GmbH was part of the
Neurotec Group, a group of high tech companies founded in Germany by Mr.
Schoneburg in 1993. In 1997 he sold all of his shares in Neurotec GmbH to the
remaining stockholders and contemporaneously purchased 100% of the shares of the
Company from Neurotec GmbH. From 1989 to 1994 Mr. Schoneburg was a professor for
industrial applications of artificial intelligence at Fachhochschule Furtwangen,
Germany. From 1988 to 1993, he was the Chairman of the BIT Group, a group of
five German high tech companies which he founded in 1988.
Mr. Schoneburg was awarded the First Prize of the Berlin Innovation Award
in 1990 for the development of the First European Neural Compiler and again in
1992 for the development of an expert system for detecting chemical hazards for
Procter and Gamble. He has published five course books on a wide variety of
topics such as computer viruses, neural networks, evolution strategies and
genetic programming and over 60 research papers on related topics. He is also a
member of the jury of the Golden Award of Montreux.
Bruno Gabriel joined the Company's Board of Directors in September 1998.
Since 1989, Mr. Gabriel has been a management consultant to several European
companies. From 1984 to 1989, he was the Chief Executive Officer and President
of the ALSO Group, a European distributor of personal computers and computer
equipment which he founded in 1984. From 1978 to 1984, Mr. Gabriel was the Chief
Executive Officer of ADV/ORGA Switzerland, a software and consulting company.
From 1976 until 1978, he was manager for new media at Tagesanzeiger Zurich, a
Swiss newspaper company. Mr. Gabriel began his career in 1971 as a manager for
software development at the Telekurs AG, a Swiss telecommunications company.
Elmar Wohlgensinger joined the Company's Board of Directors in September
1998. He has worked for the IHA Institute, a Swiss market research company,
since 1961 where he has been a member of the board since 1970 and President
since 1980. Mr. Wohlgensinger is a Vice President of ATAG Holding, an accounting
firm, and has been a member of ATAG Ernst & Young management, an accounting
firm, since 1991. Mr. Wohlgensinger also serves on the boards of German GFK, EKN
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Bank Nidwalden, Schweizerische Gesellschaft Fuer Marketing and the Chamber of
Commerce of Central Switzerland.
Hartmut Bergmann has been appointed to join the Board of Directors upon
completion of the Offering pursuant to an agreement between the Company and the
Representatives. See "Underwriting." Mr. Bergmann has been Chairman of the
Management Board of New York Broker Deutschland AG since 1990. From 1976 until
he joined New York Broker Deutschland AG, he was with Hornblower Fischer AG, a
regional German brokerage firm where he was a Member of the Management Board
from 1976 through 1989. Previously he was a financial consultant with Merrill
Lynch in Germany.
Robert Pantano, the Company's Chief Financial Officer, joined the Company
in April 1995 as an accountant, was appointed Controller and Director of Human
Resources in 1996 and was promoted to his present position in September 1997.
From 1993 until joining the Company, Mr. Pantano worked as the Controller and
General Manager of Intertech International Corp., an international engineering
firm. From 1990 to 1993, he was a Principal with Global Vision International, an
international export trade consulting firm specializing in central and eastern
Europe. Mr. Pantano holds a B.A. in accounting from Bentley College.
Klaus Kater joined the Company as Chief Technology Officer in May 1998.
From December 1997 through April 1998, Mr. Kater provided consulting services to
the Company. Prior to that time, from June 1997 to December 1997, he was
Managing Director for the mediaCenter Research Institute GmbH, a German
multimedia research center and a subsidiary of Neurotec GmbH. From March 1996 to
July 1997, Mr. Kater worked as a freelance consultant, coordinating the
activities of the Wirtschaftsforderungsgesellschaft Business Development
Institute in the context of multimedia initiatives, and concurrently from 1993
to 1996, he worked for Neurotec GmbH, where he served as project manager for
chemical expert systems. From 1992 to 1993, Mr. Kater was a project manager at
Expert Informatik GmbH, where he managed a team that developed an expert system
for Procter & Gamble. From 1990 to 1992, he ran his own company Kater & Stirm
Softwareentwicklung GbR which produced and sold software for the hotel
management market. Mr. Kater holds a degree in computer science and artificial
intelligence from Fachhochschule of Furtwangen in Germany.
BOARD OF DIRECTORS
The Board of Directors of the Company will be divided into three classes as
nearly equal in number as possible upon consummation of this Offering. Each year
the stockholders will elect the members of one of the three classes to a
three-year term of office. Mr. Wohlgensinger will serve in the class whose term
expires in 1999; Mr. Gabriel will serve in the class whose term expires in 2000;
and Mr. Schoneburg will serve in the class whose term expires in 2001. Upon
consummation of the Offering, the Representatives will have the right to appoint
one member of the Board of Directors of the Company for a period of five years.
The Representatives have named Hartmut Bergmann as their appointee and he will
be elected to the class whose term expires in 2000 effective upon consummation
of the Offering.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has a Compensation Committee which makes
recommendations concerning salaries and incentive compensation for employees of
and consultants to the Company, including salaries and incentive compensation
for executive officers. Initially, the whole Board will take action on the
recommendations of the Compensation Committee and will administer the 1998
Equity Incentive Plan. The Board also has an Audit Committee, which reviews the
results and scope of audits and other services provided by the Company's
independent public accountants and matters relating to the Company's internal
control systems.
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<PAGE> 47
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Wohlgensinger and Bergmann, both non-employee directors, will
constitute the Company's Compensation Committee. No executive officer of the
Company will serve as a member of the board of directors or compensation
committee of any entity that has one or more executive officers serving as a
member of the Company's Board of Directors or Compensation Committee.
COMPENSATION OF DIRECTORS
Directors who are not employees of the Company receive $3,000 for each
meeting of the Board of Directors attended and are reimbursed for reasonable
out-of-pocket expenses incurred in attending such meetings. Non-employee
directors are also eligible for participation in the Company's 1998 Equity
Incentive Plan, and the Company may in the future grant non-qualified stock
options to non-employee directors as an incentive to join or remain on the Board
of Directors.
ADVISORY BOARD
The Company's Advisory Board consists of individuals with demonstrated
expertise in fields related to the Company's business who advise the Company
concerning long-term planning, research and development. Members also evaluate
the Company's research programs, recommend personnel to the Company and advise
the Company on technology matters. The Advisory Board has advised the Company on
specific marketing, management and artistic technical issues. Advisory Board
members are compensated on a time and expenses basis and have received options
to purchase shares of Common Stock of the Company.
No member of the Advisory Board is employed by the Company, and members may
have other commitments to or consulting or advisory contracts with their
employers or other entities that may conflict or compete with their obligations
to the Company. Accordingly, such persons are expected to devote only a small
portion of their time to the Company. The members of the Company's Advisory
Board are:
<TABLE>
<CAPTION>
ADVISOR AFFILIATION EXPERTISE
- -------------------------------- ----------------------- -----------------------
<S> <C> <C>
Hermann Wolf Richter............ HWR Strategic Marketing Internet and Multimedia
Prof. Petr Vrana................ Universitat of Kassel Media Arts
Prof. Paulo Gaudino, Ph.D....... Boston University Neural Science and
Cognitive Computing
</TABLE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION. The following table sets forth certain information
with respect to compensation paid or accrued for services rendered to the
Company in all capacities for the fiscal year ended December 31, 1997 by its
present and former Chief Executive Officer (the "Named Executive Officers"). No
other executive officer of the Company earned greater than $100,000 in the
fiscal year ended December 31, 1997(1).
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------------------
OTHER ANNUAL
NAME AND PRINCIPAL POSITION(1) YEAR SALARY($) BONUS($) COMPENSATION
- ------------------------------ ---- --------- -------- ------------
<S> <C> <C> <C> <C>
Eberhard Schoneburg
President and Chief
Executive Officer(2)................ 1997 $ 54,254 -- $22,500(3)
Pamela A. Tomkinson
Former Chief Executive
Officer(4).......................... 1997 $113,861 -- --
</TABLE>
- ---------------
(1) Neither Robert Pantano, who became the Company's Chief Financial Officer in
September 1997, nor Klaus Kater, who became the Company's Chief Technology
Officer in May 1998,
45
<PAGE> 48
had total compensation which exceeded $100,000 in the fiscal year ended
December 31, 1997. However, both Mr. Pantano and Mr. Kater entered into
employment agreements with the Company on May 1, 1998, under which each will
receive an annual base salary of $100,000. See "-- Executive Employment
Agreements."
(2) Mr. Schoneburg assumed the position of Chief Executive Officer in October
1997.
(3) Consists of rent paid by the Company for an apartment occupied by Mr.
Schoneburg. The Company ceased making such payments in January 1998.
(4) Ms. Tomkinson resigned as Chief Executive Officer on October 20, 1997.
OPTION GRANTS. There were no options granted by the Company during the
fiscal year ended December 31, 1997 to any of the Named Executive Officers.
OPTION EXERCISES AND YEAR-END OPTION VALUES. The Named Executive Officers
did not exercise any options during the fiscal year ended December 31, 1997 and
did not hold any stock options at December 31, 1997.
EXECUTIVE EMPLOYMENT AGREEMENTS
Under an Executive Employment Agreement dated July 1, 1998, and amended and
restated as of September 1, 1998, the Company has agreed to employ Eberhard
Schoneburg as President, Chief Executive Officer and Chairman of the Board of
Directors for a period of three years at an initial annual base salary of
$240,000 plus an incentive bonus equal to 3% of the Company's income from
operations. The agreement also provides that the annual base salary will
increase as determined by the Board but at not less than 10% per year. If Mr.
Schoneburg is terminated without cause (including a failure to renew the
agreement) or if he terminates his employment for "good reason" (as defined in
the agreement), he will be entitled to receive a lump sum payment of one to
three times (depending upon whether such termination occurs before or after a
change of control of the Company) the sum of (i) his base salary plus (ii) the
greater of the average of his two most recent annual bonuses or his annual bonus
payable in the year of termination. The agreement also contains a non-compete
and non-solicitation provision which covers the longer of the term of his
employment or any time period during which he serves as a director of the
Company, plus a period of one year thereafter.
Pursuant to Employment Agreements dated May 1, 1998, the Company has agreed
to employ Robert Pantano as Chief Financial Officer and Klaus Kater as Chief
Technology Officer (each an "Officer" and collectively, the "Officers") for at
least eighteen months at initial annual base salaries of $100,000. The
agreements also provide that the Officers are entitled to participate in any
bonus and incentive programs that may be in effect for employees of the Company
and that the Officers' base salaries will be reviewed at least annually by the
Company's Chief Executive Officer and may be adjusted upward at such time at the
sole discretion of the Chief Executive Officer. On May 1, 1999 the Officers will
each be entitled to receive stock options with a fair market value of $25,000.
If either Officer is terminated by the Company without "cause" (as defined in
the agreements) or if he terminates his employment for "good reason" (as defined
in the agreements) he is entitled to severance pay, at the rate in effect on the
termination date, for a period of six months. The agreements also contain
non-compete and non-solicitation provisions which cover the term of the
Officer's employment plus any additional time during which the Officer is
receiving any severance benefits from the Company, as well as confidentiality
and assignment of invention and intellectual property provisions.
EMPLOYEE BENEFIT PLANS
1998 EQUITY INCENTIVE PLAN. The Company's 1998 Equity Incentive Plan (the
"Incentive Plan") was approved by the Company's Board of Directors and its
stockholders in April 1998. The Incentive Plan authorizes the grant of incentive
stock options within the meaning of Section 422 of the Internal
46
<PAGE> 49
Revenue Code of 1986, as amended (the "Code"), non-qualified stock options,
stock grants and certain stock equivalents (including, but not limited to,
phantom stock, performance units, dividend equivalents and stock appreciation
rights) (collectively "stock awards"). A total of 1,200,000 shares of Common
Stock (subject to adjustment for stock splits and similar capital changes) have
been reserved for issuance under the Incentive Plan, and 26,083 shares had been
issued pursuant to stock awards granted under the Incentive Plan, 655,569 shares
were subject to outstanding options and 518,345 shares were available for future
grant. Grants of stock awards under the Incentive Plan and all questions of
interpretations with respect to the Incentive Plan are determined by the
Compensation Committee of the Board of Directors of the Company or the whole
Board of Directors, if applicable.
In the event of a change of control of the Company, the Compensation
Committee in its discretion may, at the time a stock award is made or at any
time thereafter, take one or more of the following actions: (i) provide for the
acceleration of any time period relating to the exercise or payment of a stock
award; (ii) provide for payment of cash or other property with a fair market
value equal to the amount that would have been received upon the exercise or
payment of a stock award had the stock award been exercised or paid upon the
change in control; (iii) adjust the terms of a stock award in a manner
determined by the Compensation Committee to reflect the change in control; (iv)
cause a stock award to be assumed, or new rights substituted therefor, by
another entity; or (v) make such other provision as the Compensation Committee
may consider equitable and in the best interests of the Company.
401(K) PLAN. The Company's 401(k) Profit Sharing Plan (the "401(k) Plan")
covers substantially all employees of the Company. Each year, participants may
contribute from 2% to 15% of pretax annual compensation, subject to the
statutory limit (a maximum of $10,000 in 1998). In addition, the Company makes a
matching contribution equal to 50% of each participant's elective contribution
up to a maximum of 1.5% of the participant's annual compensation. Participants
are immediately vested in their contributions plus actual earnings thereon. A
participant is 100% vested in the Company's matching contributions after five
"years of service" (as defined in the 401(k) Plan).
LIMITATION OF DIRECTORS' LIABILITY AND INDEMNIFICATION
The Delaware General Corporation Law (the "DGCL") authorizes corporations
to limit or eliminate the personal liability of directors to corporations and
their stockholders for monetary damages for breach of directors' fiduciary duty
of care. The Certificate of Incorporation of the Company limits the liability of
directors of the Company to the Company or its stockholders to the fullest
extent permitted by Delaware law. See "Description of Capital Stock -- Delaware
Law and Certain Charter and Bylaw Provisions."
The Certificate of Incorporation of the Company provides mandatory
indemnification rights to any officer or director of the Company who, by reason
of the fact that he or she is an officer or director of the Company, is involved
in a legal proceeding of any nature. Such indemnification rights include
reimbursement for expenses incurred by such officer or director in advance of
the final disposition of such proceeding in accordance with the applicable
provisions of the DGCL. Such limitation of liability and indemnification may not
apply to liabilities arising under the Federal securities laws and does not
affect the availability of equitable remedies.
There is no pending litigation or proceeding involving a director, officer,
employee or agent of the Company in which indemnification by the Company will be
required or permitted. The Company is not aware of any threatened litigation or
proceeding that may result in a claim for such indemnification.
47
<PAGE> 50
CERTAIN TRANSACTIONS
DIRECTORS AND EXECUTIVE OFFICERS
The Company was founded in November 1994 as Neurotec International Corp., a
wholly-owned subsidiary of Neurotec Hochtechnologie GmbH ("Neurotec GmbH"), a
German multimedia and Internet solutions company owned by Eberhard Schoneburg,
Artificial Life's President, Chief Executive Officer and Chairman, and two
corporate investors: a major German retailer and an industrial conglomerate. In
July 1997, Mr. Schoneburg sold all of his shares of Neurotec GmbH to the
remaining stockholders and contemporaneously purchased 100% of the shares of the
Company (Neurotec International Corp.) from Neurotec GmbH for approximately
$500,000.
On June 29, 1998, Mr. Schoneburg loaned the Company $500,000 at an annual
interest rate of 10%. The full amount of the loan, including principal and all
accumulated interest thereon, is due and payable on January 1, 2000.
Beginning January 1, 1998, Mr. Schoneburg's salary was deferred. During the
time that his salary was deferred, the Company made net advances to Mr.
Schoneburg of approximately $273,000 for living and personal expenses. On
September 25, 1998 the Company paid Mr. Schoneburg a total of $175,385
representing 38 weeks of deferred salary. Mr. Schoneburg used the after tax
proceeds of this payment to repay a portion of the advances made to him during
the deferral period.
Prior to the time that they became directors of the Company in September
1998, Bruno Gabriel and Elmar Wohlgensinger provided consulting services to the
Company. During that time, Messrs. Gabriel and Wohlgensinger advised the Company
on strategic and logistical issues regarding the establishment of business
opportunities outside the United States. In consideration for such services, in
1998 Mr. Gabriel was paid an aggregate of $69,400 by the Company and on June 30,
1998, Messrs. Gabriel and Wohlgensinger were granted options to purchase 184,426
and 163,934 shares of Common Stock, respectively. These options are exercisable
immediately for a period of one year at an exercise price of $3.66 per share.
In September 1998, the Company raised gross proceeds of $4,120,000 by
completing a private placement of 824,000 shares of Common Stock with 23
investors at a price of $5.00 per share. Mr. Wohlgensinger, a director of the
Company, purchased 80,000 shares of Common Stock in this private placement for
an aggregate purchase price of $400,000.
Future material transactions and loans will be made or entered into on
terms that are no less favorable to the issuer than those that could be obtained
from unaffiliated third parties, and any forgiveness of loans will be approved
by a majority of the issuer's independent directors who do not have an interest
in the transaction and who have access, at the issuer's expense, to issuer's or
independent counsel.
48
<PAGE> 51
PRINCIPAL, SELLING AND REGISTERING STOCKHOLDERS
The following table and footnotes set forth certain information regarding
the beneficial ownership of the Company's Common Stock as of November 3, 1998,
and as adjusted to reflect the sale of the shares offered by the Company and the
Selling Stockholder in this Offering, by (i) persons known by the Company to be
beneficial owners of more than 5% of the outstanding shares of Common Stock,
(ii) the Selling Stockholder, (iii) the Registering Stockholders, (iv) the Named
Executive Officers and other executive officers, (v) each director of the
Company and (vi) all current executive officers and directors as a group:
<TABLE>
<CAPTION>
SHARES OF SHARES OF
COMMON STOCK COMMON STOCK
BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
THE OFFERING(1) THE OFFERING(1)
NAME AND ADDRESS(2) OF ----------------------- SHARES -----------------------
BENEFICIAL OWNER NUMBER PERCENT(3) OFFERED NUMBER PERCENT(3)
- ---------------------- --------- ---------- ------- --------- ----------
<S> <C> <C> <C> <C> <C>
Eberhard Schoneburg............ 5,967,377 75.8% 400,000 5,567,377 61.4%
Cybermind Interactive Europe
AG............................. 409,836 5.2% -- 409,836 4.5%
Am Borsigturm 48
13507 Berlin
Germany
Pamela A. Tomkinson(4)......... 0 * -- 0 *
Robert Pantano(5).............. 41,442 * -- 41,442 *
Klaus Kater(5)................. 41,442 * -- 41,442 *
Bruno Gabriel(6)............... 774,426 9.6% -- 774,426 8.4%
Elmar Wohlgensinger(7)......... 243,934 3.0% -- 243,934 2.6%
Hartmut Bergmann(8)............ 0 * -- 0 *
Urs Weber(9)................... 100,000 1.3% -- 100,000 1.3%
Sonnbuel 30
CH 6024 Hildisrieden
Switzerland
Meinte de Jong(10)............. 50,000 * -- 50,000 *
Buelstrasse 14
CH 6052 Hergiswil
Switzerland
IHA-Gfm Institut Fur
Marktanalysen AG(10)........... 50,000 * -- 50,000 *
Obermattweg 9
CH 6052 Hergiswil
Switzerland
Rolf Krieger(10)............... 50,000 * -- 50,000 *
3 Felmisweidstasse
CH 6048 Horw
Switzerland
Leo Krummenacher(10)........... 50,000 * -- 50,000 *
Rainstrasse 8
CH 6052 Hergiswil
Switzerland
Ruedi Bircher(11).............. 40,000 * -- 40,000 *
Buochserstrasse 4
Ch 6370 Stans
Switzerland
</TABLE>
49
<PAGE> 52
<TABLE>
<CAPTION>
SHARES OF SHARES OF
COMMON STOCK COMMON STOCK
BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
THE OFFERING(1) THE OFFERING(1)
NAME AND ADDRESS(2) OF ----------------------- SHARES -----------------------
BENEFICIAL OWNER NUMBER PERCENT(3) OFFERED NUMBER PERCENT(3)
- ---------------------- --------- ---------- ------- --------- ----------
<S> <C> <C> <C> <C> <C>
Hergiswiler Glas AG(12)........ 30,000 * -- 30,000 *
Seestrasse 12
CH 6052 Hergiswil
Switzerland
Richard Portmann(13)........... 25,000 * -- 25,000 *
Buergenweg 6
CH 6052 Hergiswil
Switzerland
Urs Christen(14)............... 20,000 * -- 20,000 *
Achereggstrasse 10
CH 6362 Stansstad
Switzerland
Walter Gabriel(14)............. 20,000 * -- 20,000 *
Hauptstrasse 5
CH 6386 Wolfenschierren
Switzerland
Dr. Ralph W. Scheuss(14)....... 20,000 * -- 20,000 *
Bachli
CH 9053 Teufen
Switzerland
Martin Seifert(14)............. 20,000 * -- 20,000 *
Bundesplatz 12
CH 6300 Zug
Switzerland
Norbert Nix(14)................ 20,000 * -- 20,000 *
Buochserstrasse 2
CH 6730 Stans
Switzerland
Nicola Strazza(14)............. 20,000 * -- 20,000 *
Galgenried 4
CH 6370 Stans
Switzerland
Thomas Inderkum(14)............ 20,000 * -- 20,000 *
Lilienweg 4
CH 6010 Kiens
Switzerland
Walter Vollmeier(14)........... 20,000 * -- 20,000 *
Seelauberweg 2
CH 6045 Meggen
Switzerland
Erich Huwlyer(14).............. 20,000 * -- 20,000 *
Hotel Alpenhof
CH 6067 Melchtal
Switzerland
Hansjorg Kirchebner(15)........ 20,000 * -- 20,000 *
Spitalgasse 1
CH 9000 St. Gallen
Switzerland
</TABLE>
50
<PAGE> 53
<TABLE>
<CAPTION>
SHARES OF SHARES OF
COMMON STOCK COMMON STOCK
BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
THE OFFERING(1) THE OFFERING(1)
NAME AND ADDRESS(2) OF ----------------------- SHARES -----------------------
BENEFICIAL OWNER NUMBER PERCENT(3) OFFERED NUMBER PERCENT(3)
- ---------------------- --------- ---------- ------- --------- ----------
<S> <C> <C> <C> <C> <C>
Roland Niederberger(16)........ 5,000 * -- 5,000 *
Allmendstrasse 13
CH 6375 Beckenried
Switzerland
Marco Trussel(17).............. 4,000 * -- 4,000 *
Lichtershalten 6
CH 6382 Buren
Switzerland
All current executive officers
and directors as a group (6
persons)(18)................. 7,068,621 85.1% 400,000 6,668,621 70.2%
</TABLE>
- ---------------
* Less than 1%
(1) Shares of Common Stock that an individual or group has the right to acquire
within 60 days of November 3, 1998, pursuant to the exercise of options or
warrants are deemed to be outstanding for the purposes of computing the
percentage ownership of such individual or group, but are not deemed to be
outstanding for the purpose of computing the percentage ownership of any
other person shown in the table. Except as indicated in footnotes to this
table, the Company believes that the stockholders named in this table have
sole voting and investment power with respect to all shares of Common Stock
shown to be beneficially owned by them based on information provided to the
Company by such stockholders.
(2) The address of all persons who are executive officers or directors of the
Company is: c/o Artificial Life, Inc., Four Copley Place, Suite 102,
Boston, Massachusetts, 02116.
(3) Percentage of ownership is based on 7,870,574 shares of Common Stock
outstanding on November 3, 1998 and 9,070,574 shares of Common Stock
outstanding after the completion of this Offering.
(4) Ms. Tomkinson resigned as Chief Executive Officer of the Company on October
20, 1997.
(5) Consists solely of shares subject to stock options which are currently
exercisable.
(6) Includes 184,426 shares subject to stock options which are currently
exercisable.
(7) Includes 163,934 shares subject to stock options, which are currently
exercisable. Also includes 16,000 shares which are registered hereby but
are subject to a lock-up agreement with New York Broker, Inc. and may not
be sold, without the consent of New York Broker, Inc., until 180 days after
the date of this Prospectus.
(8) Mr. Bergmann will become a director upon consummation of the Offering. See
"Underwriting."
(9) Includes 20,000 shares which are registered hereby but are subject to a
lock-up agreement with New York Broker, Inc. and may not be sold, without
the consent of New York Broker, Inc., for a period of 180 days after the
date of this Prospectus.
(10) Includes 10,000 shares which are registered hereby but are subject to a
lock-up agreement with New York Broker, Inc. and may not be sold, without
the consent of New York Broker, Inc., for a period of 180 days after the
date of this Prospectus.
(11) Includes 8,000 shares which are registered hereby but are subject to a
lock-up agreement with New York Broker, Inc. and may not be sold, without
the consent of New York Broker, Inc., for a period of 180 days after the
date of this Prospectus.
51
<PAGE> 54
(12) Includes 6,000 shares which are registered hereby but are subject to a
lock-up agreement with New York Broker, Inc. and may not be sold, without
the consent of New York Broker, Inc., for a period of 180 days after the
date of this Prospectus.
(13) Includes 5,000 shares which are registered hereby but are subject to a
lock-up agreement with New York Broker, Inc. and may not be sold, without
the consent of New York Broker, Inc., for a period of 180 days after the
date of this Prospectus.
(14) Includes 4,000 shares which are registered hereby but are subject to a
lock-up agreement with New York Broker, Inc. and may not be sold, without
the consent of New York Broker, Inc., for a period of 180 days after the
date of this Prospectus.
(15) Includes 2,000 shares which are registered hereby but are subject to a
lock-up agreement with New York Broker, Inc. and may not be sold, without
the consent of New York Broker, Inc., for a period of 180 days after the
date of this Prospectus.
(16) Includes 1,000 shares which are registered hereby but are subject to a
lock-up agreement with New York Broker, Inc. and may not be sold, without
the consent of New York Broker, Inc., for a period of 180 days after the
date of this Prospectus.
(17) Includes 800 shares which are registered hereby but are subject to a
lock-up agreement with New York Broker, Inc. and may not be sold, without
the consent of New York Broker, Inc., for a period of 180 days after the
date of this Prospectus.
(18) Includes 431,244 shares subject to stock options which are currently
exercisable.
52
<PAGE> 55
DESCRIPTION OF CAPITAL STOCK
Effective upon consummation of the Offering, the Company's authorized
capital stock will consist of 30,000,000 shares of Common Stock, par value $.01
per share ("Common Stock"), and 5,000,000 shares of Preferred Stock, par value
$.01 per share ("Preferred Stock"). Upon completion of this Offering, there will
be 9,070,574 shares of Common Stock and no shares of Preferred Stock
outstanding. As of November 3, 1998, there were 7,870,574 shares of Common Stock
outstanding, held of record by 35 stockholders. In addition, as of November 3,
1998 there were outstanding options to purchase 655,569 shares of Common Stock.
Upon consummation of the Offering, there will be outstanding warrants to
purchase 160,000 shares of Common Stock.
COMMON STOCK
Upon consummation of the Offering, the 53,278 outstanding shares of
Non-Voting Common Stock will be automatically converted into 53,278 shares of
Voting Common Stock and the Company's Certificate of Incorporation will not
authorize the issuance of any shares of Non-Voting Common Stock in the future.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Subject to the rights
and preferences of the holders of any outstanding Preferred Stock, the holders
of Common Stock are entitled to receive ratably such dividends as are declared
by the Board of Directors out of funds legally available therefor. In the event
of a liquidation, dissolution or winding up of the Company, holders of Common
Stock have the right to a ratable portion of assets remaining after the payment
of all debts and other liabilities of the Company, subject to the liquidation
preferences of the holders of any outstanding Preferred Stock. Holders of Common
Stock have neither pre-emptive rights nor rights to convert their Common Stock
into any other securities and are not subject to future calls or assessments by
the Company. There are no redemption or sinking fund provisions applicable to
the Common Stock. All outstanding shares of Common Stock are, and the shares
offered hereby upon issuance and sale will be, fully paid and non-assessable.
The rights, preferences and privileges of the holders of Common Stock are
subject to, and may be adversely affected by, the rights of the holders of
Preferred Stock that the Company may designate and issue in the future.
PREFERRED STOCK
The Board of Directors is authorized, subject to certain limitations
prescribed by Delaware law, without further action by the stockholders, to issue
shares of Preferred Stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof, including dividend rights,
conversion rights, voting rights, terms of redemption, liquidation preferences,
sinking fund terms, the number of shares constituting any series and the
designation of such series. The Company believes that the Board of Directors'
power to set the terms of, and the Company's ability to issue, Preferred Stock
will provide flexibility in connection with possible financing transactions in
the future. The issuance of Preferred Stock, however, could adversely affect the
voting power of holders of Common Stock and decrease the amount of any
liquidation distribution to such holders. The presence of outstanding Preferred
Stock could also have the effect of delaying, deterring or preventing a change
in control of the Company. The Company has no present plans to issue any shares
of Preferred Stock.
REPRESENTATIVES' WARRANTS
Upon consummation of the Offering, the Representatives will be granted a
warrant to purchase 160,000 shares of Common Stock at an exercise price equal to
120% of the initial public offering price. This warrant is exercisable for a
four year period beginning on the first anniversary of the date on which this
Prospectus is declared effective by the Commission and expires on the fifth
anniversary of such date. The number of shares for which the warrant is
exercisable is subject to
53
<PAGE> 56
adjustment for stock splits, combinations or dividends and reclassifications,
exchanges or substitutions. See "Underwriting."
REGISTRATION RIGHTS
The holders of 1,122,314 shares of Common Stock (the "Registrable Shares")
issued in Private Placements in June 1998 and September 1998 have "piggyback"
registration rights to request that the Company register any of such shares in
the event that the Company proposes to register any of its securities under the
Securities Act (other than in connection with an acquisition or issuance of
stock options or pursuant to a Form S-8 (for use with certain Company employee
benefit plans), Form S-4 (for use in connection with certain business
combinations involving the Company) or comparable registration statement).
However, if such piggyback registration rights are exercised in connection with
an underwritten public offering of the Company's Common Stock, the managing
underwriter of such an offering has the right to reduce the number of such
shares to be included in such public offering. In addition, holders of Common
Stock representing 824,000 of the Registrable Shares have the right, without
limitation, to include up to an aggregate of 20% of such shares for registration
in the Offering. The Company has registered 164,800 of the Registrable Shares on
behalf of the Registering Stockholders. Except for these shares, no other
Registrable Shares will form a part of the shares of Common Stock registered in
this Offering. The holders of the 164,800 Registrable Shares to be registered
hereby have entered into six-month lock-up agreements and the holders of 104,293
of the Registrable Shares have entered into one year lock-up agreements. See
"Shares Eligible for Future Sale -- Sales by Registering Stockholders."
All expenses incurred in connection with such registrations (other than
underwriters' discounts and commissions and stock transfer fees and expenses)
and the fees and expenses of legal counsel to selling stockholders will be borne
by the Company.
DELAWARE LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
The provisions of the Certificate of Incorporation and Restated Bylaws
("the Bylaws") of the Company discussed below could make more difficult or
discourage a proxy contest or other change in the Company's management or the
acquisition or attempted acquisition of control by a holder of a substantial
amount of the Company's voting stock. It is possible that such provisions could
make it more difficult to accomplish, or could deter, transactions that
stockholders may otherwise consider to be in their best interests or those of
the Company.
The Company is subject to the anti-takeover provisions of Section 203 of
the DGCL. In general, Section 203 prohibits a Delaware corporation from engaging
in a "business combination" with an "interested stockholder" for a period of
three years after the date of the transaction in which the person became an
interested stockholder, unless the business combination is, or the transaction
in which the person became an interested stockholder was, approved in a
prescribed manner or another prescribed exception applies. For purposes of
Section 203, a "business combination" is defined broadly to include a merger,
asset sale or other transaction resulting in a financial benefit to the
interested stockholder, and, subject to certain exceptions, an "interested
stockholder" is a person who, together with his or her affiliates and
associates, owns (or within three years prior, did own) 15% or more of the
corporation's voting stock.
The Board of Directors of the Company will be divided into three classes as
nearly equal in number as possible upon consummation of the Offering. Each year
the stockholders will elect the members of one of the three classes to a
three-year term of office. Upon consummation of the Offering, Mr. Wohlgensinger
will serve in the class whose term expires in 1999; Messrs. Gabriel and Bergmann
will serve in the class whose term expires in 2000; and Mr. Schoneburg will
serve in the class whose term expires in 2001. All directors elected to the
Company's classified Board of Directors will serve until the election and
qualification of their respective successors or their earlier resignation or
removal. The Board of Directors is authorized to create new directorships and to
fill
54
<PAGE> 57
such positions so created and is permitted to specify the class to which any
such new position is assigned. The person filling such position would serve for
the term applicable to that class. The Board of Directors (or its remaining
members, even if less than a quorum) is also empowered to fill vacancies on the
Board of Directors occurring for any reason for the remainder of the term of the
class of directors in which the vacancy occurred. So long as Eberhard
Schoneburg, the Company's President, Chief Executive Officer and Chairman,
directly or beneficially owns at least a majority of the outstanding shares of
capital stock then entitled to vote at an election of the directors, members of
the Board of Directors may be removed from office at any time with or without
cause by the affirmative vote of the holders of a majority of the outstanding
shares of capital stock then entitled to vote. However, if at any time Mr.
Schoneburg shall cease to directly or beneficially own at least a majority of
the outstanding shares of capital stock then entitled to vote at an election of
the directors, members of the Board of Directors may be removed from office only
for cause by the affirmative vote of the holders of a majority of the
outstanding shares of capital stock then entitled to vote. A director may be
removed for cause only after a reasonable notice and opportunity to be heard by
the stockholders. These provisions are likely to increase the time required for
stockholders to change the composition of the Board of Directors.
The Company's Bylaws provide that, for nominations to the Board of
Directors or for other business to be properly brought by a stockholder before a
meeting of stockholders, the stockholder must first have given timely notice
thereof in writing to the Secretary of the Company. To be timely, a
stockholder's notice generally must be delivered not less than 60 days nor more
than 90 days prior to the annual meeting. If the meeting is not an annual
meeting, the notice must generally be delivered not more than 90 days prior to
the special meeting and not later than the later of 60 days prior to the special
meeting or ten days following the day on which public announcement of the
meeting is first made by the Company. Only such business may be conducted at a
special meeting of stockholders as is brought before the meeting pursuant to the
Company's notice of meeting. The notice by a stockholder must contain, among
other things, certain information about the stockholder delivering the notice
and, as applicable, background information about the nominee or a description of
the proposed business to be brought before the meeting.
The Certificate of Incorporation also requires that any action required or
permitted to be taken by stockholders of the Company must be effected at a duly
called annual or special meeting of stockholders and may not be effected by a
consent in writing. Special meetings of the stockholders may be called only by
the Board of Directors of the Company pursuant to a resolution adopted by a
majority of the total number of directors authorized.
The DGCL provides generally that the affirmative vote of a majority of the
shares entitled to vote on any matter is required to amend a corporation's
certificate of incorporation or bylaws, unless the corporation's certificate of
incorporation or bylaws, as the case may be, requires a greater percentage. The
Certificate of Incorporation of the Company requires the affirmative vote of the
holders of at least 70% of the outstanding voting stock of the Company, voting
together as a single class, to amend or repeal any of the provisions discussed
in this section entitled "Delaware Law and Certain Charter and Bylaw Provisions"
or to reduce the number of authorized shares of Common Stock or Preferred Stock.
Such 70% stockholder vote would be in addition to any separate class vote that
might in the future be required pursuant to the terms of any preferred stock
that might then be outstanding. Such 70% vote is also required for any amendment
to, or repeal of, the Company's Bylaws by the stockholders. The Bylaws may also
be amended or repealed by a simple majority vote of the Board of Directors.
As permitted by the DGCL, the Certificate of Incorporation provides that
directors of the Company shall not be personally liable to the Company or its
stockholders for monetary damages for beach of the director's fiduciary duties
as a director, except for liability (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) for unlawful payments of dividends or unlawful stock repurchases or
redemptions, as provided in Section 174 or
55
<PAGE> 58
successor provisions of the DGCL, or (iv) for any transaction from which the
director derives an improper personal benefit.
The Certificate of Incorporation and Bylaws of the Company provide that the
Company shall indemnify its directors and officers to the fullest extent
permitted by Delaware law (except, in some circumstances, with respect to suits
initiated by the director or officer) and advance expenses to such directors or
officers to defend any action for which rights of indemnification are provided.
In addition, the Certificate of Incorporation and Bylaws of the Company also
permit the Company to grant such rights to its employees and agents. The Bylaws
also provide that the Company may enter into indemnification agreements with its
directors and officers and purchase insurance on behalf of any person whom it is
required or permitted to indemnify. The Company believes that these provisions
will assist the Company in attracting and retaining qualified individuals to
serve as directors, officers and employees.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company. The transfer agent's telephone number is (212)
936-5100.
56
<PAGE> 59
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no market for the Common Stock of
the Company. The Company can make no prediction as to the effect, if any, that
sales of shares or the availability of shares for sale will have on the market
price of the Common Stock prevailing from time to time. Nevertheless, sales of
significant amounts of the Common Stock in the public market, or the perception
that such sales may occur, could adversely affect prevailing market prices. See
"Risk Factors -- Shares Eligible for Future Sale."
Upon completion of this Offering, the Company expects to have 9,070,574
shares of Common Stock outstanding (excluding 655,569 and 160,000 shares
reserved for issuance upon the exercise of outstanding stock options and the
Representatives' Warrant, respectively) (9,310,574 shares of Common Stock
outstanding if the Underwriters' over-allotment option is exercised in full). Of
these shares, the 1,600,000 shares offered hereby will be freely tradable
without restrictions or further registration under the Securities Act, except
for any shares purchased by "affiliates" of the Company, as that term is defined
in Rule 144 under the Securities Act ("Rule 144"), which shares will be subject
to the resale limitations imposed by Rule 144, as described below.
All of the remaining 7,470,574 shares of Common Stock outstanding will be
"restricted securities" within the meaning of Rule 144 and may not be resold in
the absence of registration under the Securities Act, except pursuant to
exemptions from such registration including, among others, the exemption
provided by Rule 144. Of the restricted securities, no shares are eligible for
sale in the public market immediately after this Offering pursuant to Rule
144(k) under the Securities Act ("Rule 144(k)"). A total of 5,567,377 restricted
securities will be eligible for sale in the public market in accordance with
Rule 144 beginning 90 days after the date of this Prospectus. Taking into
consideration the effect of the lock-up agreements described below and the
provisions of Rules 144 and 144(k), no restricted shares will be eligible for
sale until the expiration of the lock-up agreements one year after the date of
this Prospectus, subject to the provisions of Rule 144.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are required to
be aggregated) whose restricted securities have been outstanding for at least
one year, including a person who may be deemed an "affiliate" of the Company,
may only sell a number of shares within any three-month period which does not
exceed the greater of (i) one percent of the then outstanding shares of the
Company's Common Stock (approximately 90,705 shares after this Offering) or (ii)
the average weekly trading volume in the Company's Common Stock in the four
calendar weeks immediately preceding such sale. Sales under Rule 144 are also
subject to certain requirements as to the manner of sale, notice and the
availability of current public information about the Company. A person who is
not an affiliate of the issuer, has not been an affiliate within three months
prior to the sale and has owned the restricted securities for at least two years
is entitled to sell such shares under Rule 144(k) without regard to any of the
limitations described above.
Beginning 90 days after the date of this Prospectus, certain shares issued
or issuable upon the exercise of options granted by the Company prior to the
date of this Prospectus will also be eligible for sale in the public market
pursuant to Rule 701 under the Securities Act ("Rule 701"). In general, Rule 701
permits resales of shares issued pursuant to certain compensatory benefit plans
and contracts, commencing 90 days after the issuer becomes subject to the
reporting requirements of the Securities and Exchange Act of 1934, as amended,
in reliance upon Rule 144, but without compliance with certain restrictions of
Rule 144, including the holding period requirements. As of November 3, 1998, the
Company has granted options covering 655,569 shares of Common Stock that have
not yet been exercised and which become exercisable at various times in the
future. Any shares of Common Stock issued upon the exercise of options, in
addition to the 701 Shares (as defined below), will be eligible for sale
pursuant to Rule 701.
As of November 3, 1998, the Company has also issued 26,083 shares of Common
Stock pursuant to the exercise of stock options (the "701 Shares").
57
<PAGE> 60
The executive officers and directors and certain other existing
stockholders of the Company, who beneficially own in the aggregate 6,678,360
shares of Common Stock and holders of options to purchase 431,244 shares of
Common Stock, have agreed that they will not, without the prior written consent
of New York Broker, Inc., offer, pledge, sell, contract to sell, grant any
option to purchase or otherwise dispose of, directly or indirectly, any shares
of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock for a period of one year after the date of this
Prospectus, and, with respect to 184,800 Registrable Shares (as defined below)
to be registered on behalf of the Registering Stockholders, for a period of 180
days after the date of this Prospectus.
Upon completion of this Offering, holders of 1,122,314 shares of Common
Stock will be entitled to certain registration rights (the "Registrable
Shares"). Registration of such shares under the Securities Act would result in
such shares becoming fully tradeable without restriction (except for shares
purchased by affiliates of the Company) immediately upon effectiveness of such
registration. However, pursuant to the lock-up agreements, 104,983 of these
shares of Common Stock may not be sold for one year after the date of this
Prospectus without the prior written consent of New York Broker, Inc. If such
holders, by exercising their rights, cause a large number of shares to be
registered and sold on the public market, such sales could have a material
adverse effect on the market price of the Company's Common Stock. The Company
has registered an aggregate of 164,800 shares of Common Stock for sale by the
Registering Stockholders; however, such shares may not be sold, without the
consent of New York Broker, Inc., until 180 days after the date of this
Prospectus. See "-- Sales by Registering Stockholders."
SALES BY REGISTERING STOCKHOLDERS
The Company has been advised by the Registering Stockholders that they may,
from time to time, sell some or all of the shares of Common Stock registered for
such stockholders, following the expiration of the 180 day lock-up period to
which their shares are subject. See "Principal, Selling and Registering
Stockholders." The Company is not aware of any current intention or agreement,
written or oral, on the part of the Registering Stockholders to sell any of
their shares of Common Stock through underwriters, brokers, dealers or agents.
The Registering Stockholders (after expiration of the 180 day lock-up
period) may sell the shares of Common Stock registered hereby to one or more
underwriters for public offering and sale by them, to investors directly or to
agents that solicit or receive offers on behalf of the Registering Stockholders,
or to dealers or through a combination of any such method of sale.
The shares of Common Stock may be distributed in one or more transactions,
from time to time, at a fixed price or prices (which may be changed from time to
time) in market prices prevailing at the time of sale, at prices based upon such
prevailing market prices or at negotiated prices. The Registering Stockholders
also may, from time to time, authorize agents to act on a best efforts or other
basis to solicit and receive offers to purchase shares of Common Stock.
Any underwriting commission paid by the Company or Registering Stockholders
to underwriters or agents in connection with the offering of shares of Common
Stock, and any discounts, concessions or commissions allowed by underwriters to
participating dealers, will be set forth in a prospectus. Underwriters, dealers
and agents participating in the distribution of shares of Common Stock
(including agents only soliciting or receiving offers to purchase shares on
behalf of the Company) may be deemed to be underwriters, and any discounts or
commissions received by them and any profit realized by them on resale of the
shares may be deemed to be underwriting discounts and commissions under the
Securities Act.
58
<PAGE> 61
UNDERWRITING
Subject to the terms and conditions set out in the underwriting agreement,
dated , 1998, among the Company, the Selling Stockholder and the
Underwriters (the "Underwriting Agreement"), the Underwriters, acting through
New York Broker, Inc. (the "Representative") and New York Broker Deutschland AG
(the "International Manager" and together with New York Broker, Inc., the
"Representatives"), have severally agreed to purchase from the Company and from
the Selling Stockholder, the number of shares of Common Stock set forth opposite
their respective names below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
New York Broker, Inc. ......................................
New York Broker Deutschland AG..............................
---------
Total............................................. 1,600,000
=========
</TABLE>
Pursuant to the Underwriting Agreement, the shares of Common Stock are
being offered and sold through two selling groups. New York Broker, Inc. is
acting as Representative for the U.S. Selling Group which is offering and
selling shares of Common Stock only in the United States. New York Broker
Deutschland AG is acting as International Manager with respect to the
International Selling Group which is offering and selling shares of Common Stock
in all countries outside of the United States.
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all of the shares of Common Stock offered hereby
(other than those covered by the over-allotment option described below), if any
are purchased. The Company and the Selling Stockholder have been advised that
the Underwriters propose initially to offer the shares of Common Stock to the
public at the offering price set forth on the cover page of this Prospectus and
to certain selected dealers at such price less a concession not in excess of
$ per share. The public offering price and other selling terms may be
changed by the Representative after the initial offering to the public.
The Underwriting Agreement provides for indemnification among the Company,
the Selling Stockholder and the Underwriters against certain liabilities in
connection with this Offering, including liabilities under the Securities Act.
The Company has granted the Underwriters an option exercisable during the
30 day period after the date of this Prospectus to purchase up to an aggregate
of 240,000 additional shares of Common Stock at the public offering price, less
the Underwriting discounts and commissions, for the sole purpose of covering
over-allotments, if any. To the extent that the Underwriters exercise such
option, each Underwriter will become obligated, subject to certain conditions,
to purchase approximately the same percentage of such additional shares as the
number set forth next to such Underwriter's name in the table above bears to the
total number of shares in such table, and the Company will be obligated,
pursuant to the option, to sell such shares to the Underwriters.
Upon consummation of the Offering, the Representatives will have the right
to appoint one member to the Board of Directors of the Company for a period of
five years. The Representatives have named Hartmut Bergmann as their appointee
and he will be elected to the class whose term expires in 2000. Mr. Bergmann is
Chairman of the Management Board of New York Broker Deutschland AG.
The Company has agreed to pay the Underwriters a non-accountable expense
allowance of three percent of the gross proceeds derived from the sale of the
shares of Common Stock, of which
59
<PAGE> 62
$30,000 has been paid to date. The Company has also agreed to pay all expenses
in connection with qualifying the shares of Common Stock offered hereby for sale
under the laws of such states as the Underwriters may designate, including
expenses of counsel retained for such purpose by the Underwriters. The Company
has also agreed to pay the expenses of the Selling Stockholder. In addition, the
Company has agreed to pay the fees of German and United States counsel for the
Underwriters which includes the cost of preparation of all filings with the
Securities and Exchange Commission and the Nasdaq Stock Market which fees are
customarily incurred by issuers.
The Company has agreed to sell to the Representatives and their designees
for $100 a warrant (the "Representatives' Warrant") to purchase up to 160,000
shares of Common Stock (184,000 shares if the Underwriters' over-allotment
option is exercised in full) for a period of four years commencing one year from
the date of this Prospectus at a price equal to 120% of the initial public
offering price. During the Warrant exercise term, the holders of the
Representatives' Warrant are given, at nominal cost, the opportunity to profit
from a rise in the market price of the Company's Common Stock with a resulting
dilution in the interest of other stockholders. In addition, during that period,
the terms on which the Company will be able to obtain additional capital may be
adversely affected, because the Representatives are likely to exercise the
Representatives' Warrant at a time when the Company would, in all likelihood, be
able to obtain capital by a new offering of securities on terms more favorable
than those provided in the Representatives' Warrant. Any profit realized by the
Representatives on the sale of the Representatives' Warrant or the underlying
shares of Common Stock may be deemed additional underwriting compensation. See
"Description of Capital Stock -- Representatives' Warrant."
The Company, and its officers, directors and certain other stockholders who
beneficially own 6,678,360 shares in the aggregate, have agreed not to offer,
pledge, sell, contract to sell, grant any option to purchase or otherwise
dispose of, directly or indirectly, any shares of Common Stock, or any
securities convertible into or exchangeable or exercisable for, or any rights to
purchase or acquire, shares for a period of one year following the date of this
Prospectus without the prior written consent of the Representative which may, in
its sole discretion and at any time without notice, release all or any portion
of the shares subject to such lock-up agreements.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the liability of the Underwriters
and certain selling group members to bid for and purchase the Common Stock. As
an exception to these rules, the Underwriters are permitted to engage in certain
transactions that stabilize the price of the Common Stock. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offering, i.e., they sell a greater aggregate number of
shares of Common Stock than is set forth on the cover page of this Prospectus,
the Underwriters may reduce the short position by purchasing shares of Common
Stock in the open market. The Underwriters may also elect to reduce any short
position by exercising all or part of the over-allotment option described above.
The Underwriters may also impose a penalty bid on certain selling group
members. This means that if the Underwriters purchase Common Stock in the open
market to reduce the selling group members' short position or to stabilize the
price of the Common Stock, they may reclaim the amount of the selling concession
from the selling group members who sold those shares of Common Stock as part of
the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of a security to be higher than it
might be in the absence of such purchases.
60
<PAGE> 63
The imposition of a penalty bid might also have an effect on the price of a
security to the extent that it were to discourage resales of the security.
Neither the Company nor the Representatives make any representations or
predictions as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor the Representatives make any representations that the
Underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
Prior to the Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price for the Common Stock will
be determined by negotiations between the Company and the Representatives of the
Underwriters. Among the factors to be considered in such negotiations are
prevailing market and general economic conditions, the market capitalizations,
trading histories and stages of development of other traded companies that the
Company and the Representatives believe to be comparable to the Company, the
results of operations of the Company in recent periods, the current financial
position of the Company, estimates of business potential of the company and the
present state of the Company's development and the availability for sale in the
market of a significant number of shares of Common Stock. Additionally,
consideration will be given to the general status of the securities market, the
market conditions for new issues of securities and the demand for securities of
comparable companies at the time the Offering was made.
LEGAL MATTERS
The validity of issuance of the Common Stock offered hereby will be passed
upon for the Company by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.,
Boston, Massachusetts. Robert Duggan, a partner with Mintz, Levin, Cohn, Ferris,
Glovsky and Popeo, P.C., is the Secretary of the Company. Certain legal matters
in connection with this Offering will be passed upon for the Underwriters by
Greenberg Traurig, P.A., Miami, Florida.
EXPERTS
The financial statements of Artificial Life as of December 31, 1996 and
1997 and for each of the three years in the period ended December 31, 1997
included in this Prospectus have been so included in reliance on the report of
Wolf & Company, P.C., Boston, Massachusetts, independent accountants, given on
the authority of said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (the "Registration Statement") under the Securities Act, with respect to the
Common Stock offered hereby. As permitted by the rules and regulations of the
Commission, this Prospectus, which is part of the Registration Statement, omits
certain information, exhibits, schedules and undertakings set forth in the
Registration Statement. For further information pertaining to the Company and
the Common Stock, reference is made to such Registration Statement and the
exhibits and schedules thereto. Statements contained in this Prospectus as to
the contents or provisions of any documents referred to herein are not
necessarily complete, and in each instance where a copy of the document has been
filed as an exhibit to the Registration Statement, reference is made to the
exhibit so filed. The Registration Statement may be inspected without charge at
the office of the Commission at 450 Fifth Street, N.W., Washington, DC 20549.
Copies of the Registration Statement may be obtained from the Commission at
prescribed rates from the Public Reference Section of the Commission at such
address, and at the Commission's regional offices located at 7 World Trade
Center, 13th Floor, New York, New York 10048, and at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. In addition, registration
statements and certain other filings made with the Commis-
61
<PAGE> 64
sion through its Electronic Data Gathering, Analysis and Retrieval ("EDGAR")
system are publicly available through the Commission's site on the Internet's
Word Wide Web, located at http://www.sec.gov. The Registration Statement,
including all exhibits thereto and amendments thereof, has been filed with the
Commission through EDGAR.
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by its independent public accountants,
and will make available quarterly reports for the first three quarters of each
fiscal year containing unaudited financial information and such other periodic
reports as the Company may determine to be appropriate or as may be required by
law or by Nasdaq.
62
<PAGE> 65
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Financial Statements:
Balance Sheets as of December 31, 1996 and 1997, and
September 30, 1998 (unaudited)......................... F-3
Statements of Operations for the years ended December 31,
1995, 1996 and 1997, and for the nine months ended
September 30, 1997 (unaudited) and 1998 (unaudited).... F-4
Statements of Changes in Stockholders' Equity for the
years ended December 31, 1995, 1996 and 1997, and for
the nine months ended September 30, 1998 (unaudited)... F-5
Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997, and for the nine months ended
September 30, 1997 (unaudited) and 1998 (unaudited).... F-6
Notes to Financial Statements............................. F-7
</TABLE>
F-1
<PAGE> 66
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Artificial Life, Inc.
Boston, Massachusetts
We have audited the accompanying balance sheets of Artificial Life, Inc.
(formerly Neurotec International Corp.) as of December 31, 1996 and 1997, and
the related statements of operations, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Artificial Life, Inc. as of
December 31, 1996 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
Wolf & Company, P.C.
Boston, Massachusetts
September 10, 1998, except for
Note 2 as to which the date is
September 22, 1998,
Notes 7 and 8 as to which the date
is September 23, 1998 and
Note 10 as to which
the date is October 16, 1998
F-2
<PAGE> 67
ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1996 1997 1998
-------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 30,139 $ 22,382 $2,606,195
Accounts receivable, trade (Note 1)....................... -- 273,187 --
Due from officer/stockholder (Note 3)..................... -- -- 172,773
Due from former parent and affiliates (Note 3)............ 251,502 243,499 --
Refundable income taxes (Note 4).......................... 18,868 6,336 8,336
Prepaid expenses and other current assets................. 33,141 59,442 35,342
-------- ---------- ----------
Total current assets............................... 333,650 604,846 2,822,646
-------- ---------- ----------
Property and equipment:
Furniture and fixtures.................................... 176,128 176,128 201,495
Computer equipment........................................ 235,151 277,344 399,835
Leasehold improvements.................................... 159,334 159,334 159,334
Office equipment.......................................... 58,696 59,435 59,435
-------- ---------- ----------
629,309 672,241 820,099
Less accumulated depreciation and amortization............ 173,829 340,029 417,732
-------- ---------- ----------
455,480 332,212 402,367
-------- ---------- ----------
Other assets:
Net deferred tax asset (Note 4)........................... 51,591 49,225 49,225
Deferred costs in connection with initial public offering
(Note 7)................................................ -- -- 121,380
Deposits and other assets................................. 44,610 98,219 119,494
-------- ---------- ----------
96,201 147,444 290,099
-------- ---------- ----------
$885,331 $1,084,502 $3,515,112
======== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to former parent............................. $ 77,922 $ -- $ --
Accounts payable.......................................... 120,539 195,159 271,203
Due to officer/stockholder................................ -- 27,015 --
Deferred revenue.......................................... -- 116,667 --
Accrued expenses (Note 9)................................. 52,176 95,252 80,201
Net deferred tax liability (Note 4)....................... 9,279 3,929 3,929
-------- ---------- ----------
Total current liabilities.......................... 259,916 438,022 355,333
-------- ---------- ----------
Note payable -- officer/stockholder (Note 3)................ -- -- 500,000
-------- ---------- ----------
Commitments and contingencies (Note 5)
Stockholders' equity (Notes 7 and 8):
Voting common stock, $.01 par value; 19,000,000 shares
authorized, 6,967,213 shares issued and outstanding in
1996 and 1997 and 7,817,296 shares issued and
outstanding in 1998..................................... 69,672 69,672 78,173
Non-Voting common stock, $.01 par value; 1,000,000 shares
authorized, 53,278 shares issued and outstanding........ -- -- 533
Additional paid-in capital................................ 430,328 430,328 4,732,372
Subscriptions and notes receivable from stockholders (Note
8)...................................................... -- -- (988,682)
Retained earnings (deficit)............................... 125,415 146,480 (1,162,617)
-------- ---------- ----------
Total stockholders' equity......................... 625,415 646,480 2,659,779
-------- ---------- ----------
$885,331 $1,084,502 $3,515,112
======== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 68
ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ ------------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues (Note 1):
Former parent and affiliates (Note
3):
Application services............ $1,216,716 $2,542,642 $ 864,177 $ 864,117 $ --
Cancellation fee income......... -- -- 189,938 -- --
---------- ---------- ---------- ---------- -----------
$1,216,716 $2,542,642 $1,054,115 $ 864,117 $ --
---------- ---------- ---------- ---------- -----------
Trade:
Software license agreements..... $ -- $ -- $ 233,333 $ 116,667 $ 116,667
Application services............ -- 247,236 482,912 428,284 332,713
---------- ---------- ---------- ---------- -----------
-- 247,236 716,245 544,951 449,380
---------- ---------- ---------- ---------- -----------
Total revenues............. 1,216,716 2,789,878 1,770,360 1,409,068 449,380
---------- ---------- ---------- ---------- -----------
Operating expenses:
Selling, general and
administrative.................. 967,271 1,101,109 1,048,897 859,220 1,078,004
Engineering--former parent
(Note 3)........................ 324,027 49,349 39,168 39,168 --
Engineering--other................ 503,444 606,737 473,099 349,258 308,897
Research and development.......... -- -- -- -- 274,045
Depreciation and amortization..... 39,734 137,300 167,962 125,407 77,703
---------- ---------- ---------- ---------- -----------
Total operating expenses... 1,834,476 1,894,495 1,729,126 1,373,053 1,738,649
---------- ---------- ---------- ---------- -----------
Income (loss) from operations....... (617,760) 895,383 41,234 36,015 (1,289,269)
Other income (expenses):
Foreign exchange gain (loss)...... (27,386) 10,319 (5,706) (5,706) --
Interest expense, net............. (7,582) (24,996) (5,247) (4,336) (19,828)
---------- ---------- ---------- ---------- -----------
Income (loss) before provision
(benefit) for income taxes........ (652,728) 880,706 30,281 25,973 (1,309,097)
Provision (benefit) for income taxes
(Note 4).......................... (256,872) 337,362 9,216 7,896 (--)
---------- ---------- ---------- ---------- -----------
Net income (loss)................... $ (395,856) $ 543,344 $ 21,065 $ 18,077 $(1,309,097)
========== ========== ========== ========== ===========
Basic and diluted net income (loss)
per share (Note 2)................ $ (.07) $ .08 $ -- $ -- $ (.19)
Weighted average shares outstanding
used in per share calculation..... 5,573,770 6,967,213 6,967,213 6,967,213 7,013,295
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 69
ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK (NOTE 7)
-------------------------------------
VOTING NON-VOTING ADDITIONAL SUBSCRIPTIONS RETAINED
------------------- --------------- PAID-IN AND NOTES EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE (DEFICIT)
--------- ------- ------ ------ ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994... 1,393,443 $13,934 -- $ -- $ 86,066 $ -- $ (22,073)
Net Loss....................... -- -- -- -- -- -- (395,856)
Issuance of Common Stock....... 5,573,770 55,738 -- -- 344,262 -- --
--------- ------- ------ ---- ---------- ---------- -----------
Balance at December 31, 1995... 6,967,213 69,672 -- -- 430,328 -- (417,929)
Net income..................... -- -- -- -- -- -- 543,344
--------- ------- ------ ---- ---------- ---------- -----------
Balance at December 31, 1996... 6,967,213 69,672 -- -- 430,328 -- 125,415
Net income..................... -- -- -- -- -- -- 21,065
--------- ------- ------ ---- ---------- ---------- -----------
Balance at December 31, 1997... 6,967,213 69,672 -- -- 430,328 -- 146,480
Net loss (unaudited)........... -- -- -- -- -- -- (1,309,097)
Issuance of common stock....... 850,083 8,501 53,278 533 4,302,044 (988,682) --
--------- ------- ------ ---- ---------- ---------- -----------
Balance at September 30, 1998.. 7,817,296 $78,173 53,278 $533 $4,732,372 $ (988,682) $(1,162,617)
========= ======= ====== ==== ========== ========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 70
ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------- -----------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................... $(395,856) $ 543,344 $ 21,065 $ 18,077 $(1,309,097)
Adjustments to reconcile net income (loss)
to net cash provided (used) by operating
activities:
Depreciation and amortization........... 39,734 137,300 167,962 125,407 77,703
Unrealized foreign exchange gain........ (4,071) (5,790) -- -- --
Deferred income taxes................... (256,872) 214,560 (2,984) -- --
(Increase) decrease in deposits and
other assets.......................... (42,471) (5,345) (55,371) 1,600 (21,275)
(Increase) decrease in due from former
parent and affiliates................. 59,515 (223,234) 8,003 3,194 243,499
(Increase) decrease in accounts
receivable, trade..................... -- -- (273,187) (294,856) 273,187
(Increase) decrease in refundable income
taxes................................. (30,258) 11,390 12,532 7,896 (2,000)
(Increase) decrease in prepaid expenses
other current assets.................. (32,378) (763) (26,301) 18,610 24,100
Increase (decrease) in accounts payable
and accrued expenses.................. 579,625 (421,910) 117,696 173,206 60,993
Increase (decrease) in deferred
revenue............................... -- -- 116,667 -- (116,667)
Increase (decrease) in due to/from
officer/stockholders.................. -- -- 27,015 (10,483) (199,788)
--------- --------- --------- --------- -----------
Net cash provided (used) by operating
activities............................ (83,032) 249,552 113,097 42,651 (969,345)
--------- --------- --------- --------- -----------
Cash flows from investing activities:
Purchases of property and equipment....... (386,833) (242,476) (42,932) (38,637) (147,858)
--------- --------- --------- --------- -----------
Cash flows from financing activities:
Repayment of note payable to former
parent.................................. -- -- (77,922) -- --
Proceeds from note payable --
officer/stockholder..................... -- -- -- -- 500,000
Deferred costs in connection with initial
public offering......................... -- -- -- -- (121,380)
Proceeds from issuance of common stock.... 400,000 -- -- -- 3,322,396
Payment of subscription receivables....... 50,000 -- -- -- --
--------- --------- --------- --------- -----------
Net cash provided (used) by financing
activities................................ 450,000 -- (77,922) -- 3,701,016
--------- --------- --------- --------- -----------
Net increase (decrease) in cash............. (19,865) 7,076 (7,757) 4,014 2,583,813
Cash at beginning of period................. 42,928 23,063 30,139 30,139 22,382
--------- --------- --------- --------- -----------
Cash at end of period....................... $ 23,063 $ 30,139 $ 22,382 $ 34,153 $ 2,606,195
========= ========= ========= ========= ===========
Supplemental disclosure of cash flow
information:
Income taxes paid......................... $ 8,327 $ 131,440 $ -- $ -- $ 2,000
Interest paid............................. 7,582 24,996 5,247 4,336 8,520
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
During the period ended September 30, 1998, the Company issued Common Stock.
As of September 30, 1998, $895,000 was still unpaid and included in
subscriptions and notes receivable from stockholders.
Also during the period ended September 30, 1998, stock options were
exercised and the Company received notes receivable in the amount of $93,682
(Note 8).
See accompanying notes to financial statements.
F-6
<PAGE> 71
ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(ALL INFORMATION WITH RESPECT TO SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
1. ORGANIZATION, RISKS AND UNCERTAINTIES
NATURE OF OPERATIONS
Artificial Life, Inc. ("Artificial Life" or the "Company") develops,
markets and supports "intelligent" software robots ("bots"). The Company's bots,
known as "SmartBots," are software programs that the Company designs to automate
and simplify time-consuming and complex business-related Internet functions such
as Web navigation, direct marketing, user profiling, information gathering,
messaging, knowledge management, sales response and call center automation. The
Company recently changed its primary business focus from software consulting to
the development, marketing and support of its Alife suite of SmartBot software
products. As a consequence of the Company's recent change in its primary
business focus, the Company expects that an increasing percentage of its future
revenues will be derived from sales and services associated with its software
robot products and that revenues from its consulting business will, as a percent
of gross revenues, significantly decrease over time.
In addition, because the Company's emerging online agent-based software
products business will require significant infusions of additional capital,
results of operations to date are not reflective of the Company's future results
of operations. The Company's decision to become a provider of software robot
products is predicated on the assumption that the demand for such products will
be large enough to permit the Company to operate profitably. There can be no
assurance that the Company's assumption will be correct or that the Company will
be able to successfully compete as a provider of such products. If the Company's
assumption is not accurate, or if the Company is unable to compete as a provider
of online agent-based software products, the Company's business, prospects,
financial condition and results of operations will be materially adversely
affected.
The Company's management has recently obtained funds to support its
operations through a combination of sources including a long-term loan from a
stockholder and private placements of Common Stock. The Company is also pursuing
additional resources through an initial public offering. (See Notes 3 and 7.)
In 1995 and 1996, the Company was a wholly-owned subsidiary of Neurotec
Hochtechnologie GmbH, a German corporation. During 1995, all of the Company's
revenue was derived from various contracts with the Company's then parent
company and its affiliates. In 1996, approximately 91% of the Company's revenues
was derived from the Company's then parent company.
During 1997, Eberhard Schoneburg, the Company's President, Chief Executive
Officer and Chairman and a minority stockholder of the Company's former parent
company, entered into an agreement with the former parent company to sell his
interest in the former parent company to the two remaining stockholders and
contemporaneously purchase all of the outstanding shares of Neurotec
International Corp. (the "Management Buyout"). In connection with the Management
Buyout, the Company agreed not to compete in any manner with the former parent
company in Europe through the period ended December 31, 1998. Subsequent to the
Management Buyout, the Company changed its name to Artificial Life, Inc.
In 1997, approximately 60% of the Company's revenue was derived from
various contracts with the Company's former parent company and its affiliates.
As a result of the Management Buyout and the Company's changing its primary
business focus from software consulting to the development, marketing and sale
of its Alife suite of SmartBot software products, the Company is not
anticipating any future revenue to be derived from its former parent (see Note
3).
F-7
<PAGE> 72
ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MAJOR CUSTOMER
During 1997, the Company recognized revenue from one customer amounting to
approximately $710,000, representing 40% of its total revenues. During the nine
months ended September 30, 1998, the substantial majority of the Company's
revenue was derived from this same customer. Accounts receivable, trade were due
entirely from this customer at December 31, 1997.
MANAGEMENT ESTIMATES
The process of preparing financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. These
estimates and assumptions involve the areas of collection of receivables,
contract costs, depreciation and amortization and certain accruals, among
others. Actual results could differ from those estimates.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial statements of the Company at September 30, 1998 and
for the nine months ended September 30, 1997 and 1998, included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission for interim financial statements. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations relating to interim
financial statements. In the opinion of management, the accompanying unaudited
interim financial statements reflect all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial position of the
Company at September 30, 1998, and the results of its operations and its cash
flows for the nine months ended September 30, 1997 and 1998.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation and amortization of
property and equipment is calculated using the straight-line method over the
following useful lives:
<TABLE>
<CAPTION>
CLASSIFICATION ESTIMATED USEFUL LIVES
-------------- ----------------------
<S> <C>
Furniture and fixtures 7 years
Computer equipment 3-5 years
Leasehold improvements Shorter of useful life or lease term
Office equipment 5 years
</TABLE>
Expenditures for maintenance, repairs and minor renewals are charged to
expense as incurred. Betterments and major renewals are capitalized.
COMPUTER SOFTWARE COSTS
Costs of developing software which are incurred beyond the point of
demonstrated technological feasibility are capitalized and, after the product is
available for general release to customers, such costs are amortized based on
the greater of the charge resulting from the straight-line method over a
three-year period or the proportion of current sales to estimated future
revenues of the
F-8
<PAGE> 73
ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
product. As of September 30, 1998, no software development costs have been
capitalized by the Company as such costs were immaterial.
REVENUE RECOGNITION
The Company recognizes revenue from marketing computer software programs as
follows:
Revenues from the sale of initial "software license agreements" for
computer programs and related services are recognized upon the delivery
of the software.
Development and application services contract revenues and related costs
are recognized upon the completion of the contract or certain phases as
defined in each agreement.
There are no significant future costs associated with any of the Company's
revenue transactions. Development costs which are not required to be
capitalized, marketing and installation costs are charged to earnings as
incurred.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." This statement establishes standards for the reporting
and display of comprehensive income and its components in a full set of general
purpose financial statements. Comprehensive income generally represents all
changes in stockholders' equity during the period except those resulting from
investments by, or distributions to, stockholders. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997 and requires restatement of
earlier periods presented. SFAS No. 130 had no impact on the Company's financial
statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the way that a public enterprise reports information about operating segments in
annual financial statements, and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
stockholders. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997 and requires restatement of earlier periods presented.
Management is currently evaluating the requirements of SFAS No. 131.
In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
(SOP) No. 97-2, "Software Revenue Recognition." SOP 97-2 provides guidance on
when revenue should be recognized and in what amounts for licensing, selling,
leasing or otherwise marketing computer software. SOP 97-2 is effective for
transactions entered into in fiscal years beginning after December 15, 1997. SOP
97-2 had no impact on the Company's Financial Statements.
COMPUTATION OF NET INCOME (LOSS) PER SHARE
The Company adopted SFAS No. 128, "Computation of Earnings Per Share,"
during the year ended December 31, 1997. The provision and disclosure
requirements for SFAS No. 128 were required to be adopted for interim and annual
periods ending after December 15, 1997, with restatement of earnings per share
for prior periods. In accordance with SFAS No. 128, basic earnings per share is
computed using the weighted average number of common shares outstanding during
the period. Diluted earnings per share is computed using the weighted average
number of common shares outstanding during the period and the weighted average
dilutive common
F-9
<PAGE> 74
ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
equivalent shares outstanding during the period. Common equivalent shares
consist of the incremental common shares issuable upon the exercise of stock
options and warrants (using the Treasury Stock method); common equivalent shares
are excluded from the calculation if their effect is anti-dilutive. All common
equivalent shares of the Company are not dilutive. Therefore, diluted earnings
per share is the same as basic earnings per share. Pursuant to SEC Staff
Accounting Bulletin No. 98, common stock issued for nominal consideration, prior
to the anticipated effective date of an IPO, are required to be included in the
calculation of basic and diluted net loss per share, as if they were outstanding
for all periods presented. To date, the Company has not had any stock issuances
for nominal consideration.
STOCK-BASED COMPENSATION
The Company has adopted the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." As allowed under the provisions of
SFAS 123, the Company applies Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for its employee stock options plans.
There are no effects on reported net income (loss) and earnings per share based
on the fair value of options and shares as prescribed by SFAS 123.
STOCK DIVIDEND, REVERSE STOCK SPLIT AND CHANGES IN AUTHORIZED STOCK
On June 10, 1998, the Company declared a dividend of 339 shares of common
stock for each share of common stock held to stockholders of record on June 10,
1998. On September 22, the Company effected a 1-for-2.44 reverse stock split and
amended the total authorized shares of Voting Common Stock to 19,000,000 shares
and Non-Voting Common Stock to 1,000,000 shares. All references in the financial
statements to shares, share prices, per share amounts, stock options and
authorized shares have been retroactively adjusted for the stock dividend,
reverse stock split and change in authorized stock. (See Note 8).
INCOME TAXES
Deferred tax assets and liabilities are recorded for temporary differences
between the financial statement and tax basis of assets and liabilities.
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. A deferred tax asset is
recorded for any net operating loss, capital loss and tax credit carryforward
for income tax purposes, to the extent their realization is more likely than
not. As changes in tax laws or rates are enacted, deferred tax assets and
liabilities will be adjusted through the provision for income taxes.
3. RELATED PARTY TRANSACTIONS
The Company had transactions with its former parent company and a
wholly-owned subsidiary of the former parent company, MediaCenter GmbH
("MediaCenter"), and a stockholder of the former parent company as follows:
a) The Company provided contract services to the former parent company
and to a stockholder of the former parent company on which it recorded
revenue of $1,216,716, $2,542,642 and $864,177 for the years ended December
31, 1995, 1996 and 1997. Certain contracts for services are denominated in
Deutsche Marks ("DM").
b) The Company received advances from the former parent company in the
amount of DM120,000. The advances were due on September 30, 1997 with
interest at 8.5%. The note
F-10
<PAGE> 75
ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
payable of $77,922 recorded on the balance sheet at December 31, 1996 is
based on the exchange rate on that date. Interest expense on these advances
amount to $7,582, $7,271 and $5,247 for the years ended December 31, 1995,
1996 and 1997, respectively. The advances were repaid in 1997, see below.
c) The former parent charged the Company for engineering services
rendered. These costs amounted to $324,027, $49,349 and $39,168 in 1995,
1996 and 1997, respectively.
d) The former parent company charged the Company for various expenses
paid on the Company's behalf and the Company charged the former parent
company and MediaCenter for various expenses paid by the Company on their
behalf as follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------- -------- -------
<S> <C> <C> <C>
Expenses paid by former parent on Company's
behalf:
Startup costs.............................. $ 281,921 $ -- $ --
Travel and promotion....................... 115,153 6,915 --
--------- -------- -------
$ 397,074 $ 6,915 $ --
========= ======== =======
Expenses paid by the Company on behalf of the
former parent:
Consortium Agreement (Note 5).............. $ -- 62,500 $46,875
Engineering costs.......................... -- 22,447 8,873
Travel and promotion....................... -- 20,506 1,497
--------- -------- -------
$ -- $105,453 $57,245
========= ======== =======
Expenses paid by the Company on behalf of the
MediaCenter:
Legal fees................................. $ -- $ 22,303 $ --
Travel and promotion....................... -- 15,789 --
Equipment.................................. -- 7,600 --
--------- -------- -------
$ -- $ 45,692 $ --
========= ======== =======
</TABLE>
The Company was charged interest on overdue amounts of $17,016 in 1996. No
interest was charged in 1995 and 1997.
In 1997, subsequent to the Management Buyout as a result of unresolved
disputes between the Company and its former parent in connection with existing
contractual obligations of the former parent, the Company discontinued
performing services for its former parent company and its affiliates. At that
time, the Company had in process several contracts for services to be provided
to the former parent company and outstanding accounts receivable from the former
parent of $160,000. In addition, the Company owed the former parent $42,016 in
accounts payable and accrued expenses, and $77,922 in notes payable. In December
of 1997, the Company and the former parent negotiated a settlement agreement
whereby the former parent agreed to forgive all outstanding liabilities owed by
the Company and make a cash payment of $230,000 in full settlement of all
outstanding accounts receivable and all of its contractual obligations to the
Company. The transaction resulted in the recognition of cancellation fee income
of $189,938 in 1997. The $230,000 payment was received in full in January 1998.
Compensation paid to the Company's President, Chief Executive Officer and
Chairman amounted to $151,296, $200,439 and $76,754 for the years ended December
31, 1995, 1996 and 1997, respectively. In 1998, the Company's President, Chief
Executive Officer and Chairman entered into an employment agreement with the
Company at an annual salary of $240,000. (See Note 5.)
F-11
<PAGE> 76
ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Amounts due from the former parent company, net and affiliates at December
31, 1996 and 1997 consists of the following:
<TABLE>
<CAPTION>
1996 1997
----------------------- -----------------------
SHAREHOLDER
FORMER FORMER OF FORMER
PARENT MEDIACENTER PARENT PARENT
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Settlement Agreement.............. $ -- $ -- $230,000 $ --
Contract services................. 213,370 -- -- 13,499
Reimbursements receivable......... 29,752 45,204 -- --
Reimbursements payable............ (35,168) -- -- --
Interest payable.................. (1,656) -- -- --
-------- ------- -------- -------
Total................... $206,298 $45,204 $230,000 $13,499
======== ======= ======== =======
</TABLE>
On June 29, 1998, the Company issued a note payable to an
officer/stockholder in the amount of $500,000. The note is unsecured and bears
interest at 10%. Payment of principal and accrued interest is due on January 1,
2000. (See Note 7). Interest accrued during the period ended September 30, 1998
amounted to $12,740 on the note payable.
The Company pays expenses on behalf of and provides cash advances to an
officer/ stockholder from time to time. Amounts outstanding are non-interest
bearing and due on demand.
4. INCOME TAXES
The income tax provision (benefit) consists of:
<TABLE>
<CAPTION>
1995 1996 1997
--------- -------- -------
<S> <C> <C> <C>
Current:
Federal....................................... $ -- $ 75,124 $ 6,700
State......................................... -- 47,678 5,500
--------- -------- -------
-- 122,802 12,200
--------- -------- -------
Deferred (prepaid):
Federal....................................... (240,766) 201,107 (2,797)
State......................................... (16,106) 13,453 (187)
--------- -------- -------
(256,872) 214,560 (2,984)
--------- -------- -------
$(256,872) $337,362 $ 9,216
========= ======== =======
</TABLE>
The difference between actual income tax expense and expected income tax
expense as computed by applying the U.S. federal income tax rate of 34% to
income before income taxes is explained as follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------- -------- -------
<S> <C> <C> <C>
Expected income tax provision (benefit)......... $(221,928) $299,440 $10,296
State taxes, net of federal income tax
benefit....................................... (10,630) 40,346 3,506
Surtax exemption................................ -- -- (5,753)
Other........................................... (24,314) (2,424) 1,167
--------- -------- -------
Provision (benefit) for income taxes.......... $(256,872) $337,362 $ 9,216
========= ======== =======
</TABLE>
F-12
<PAGE> 77
ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to the
deferred tax assets and deferred tax liabilities at December 31, 1996 and
1997, are presented below:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Deferred tax assets:
Start-up costs capitalized for income tax purposes... $69,205 $46,499
Vacation accrual not deductible for income tax
purposes.......................................... 3,114 4,182
Property and equipment............................... -- 2,726
------- -------
72,319 53,407
Valuation allowance on deferred tax asset............ -- --
------- -------
72,319 53,407
------- -------
Deferred tax liabilities:
Property and equipment............................... 17,614 --
Prepaid rent deducted for income tax purposes........ 8,422 8,111
Unrealized foreign exchange gains.................... 3,971 --
------- -------
30,007 8,111
------- -------
Net deferred tax asset............................ $42,312 $45,296
======= =======
</TABLE>
There was no change in the valuation allowance on deferred tax assets in
1996 or 1997.
The provision for income taxes for the nine-month period ended September
30, 1997 is computed based on the 1997 actual effective tax rate of 30.4%. No
benefit has been recorded in 1998 due to a 100% valuation allowance provided on
the deferred tax asset related to net operating loss carryforwards generated
during the period.
5. COMMITMENTS
CONSORTIUM AGREEMENT
Effective October 10, 1995, the Company entered into a consortium agreement
with the Massachusetts Institute of Technology ("MIT"). Under the agreement, MIT
will conduct research projects for the "Things That Think Consortium." The
Consortium is an international association of corporate members who have joined
"to address the future of computation as it is increasingly imbedded in things
other than computers." The term of the agreement is for five years through
October 9, 2000. The agreement provides for early termination, with one year
written notice, as well as renewal options. The Company is obligated to pay an
annual membership fee of $125,000 under the agreement. The Company was sharing
50% of this cost with its former parent through June 1997. (See Note 3).
On August 6, 1997, the Company obtained a suspension of the contract until
February 5, 1998, at which time the contract resumed under its original terms.
The Company will be solely responsible for the $125,000 annual cost through
October 9, 2000. Total costs incurred by the Company in connection with the
agreement amounted to $60,625, $62,500, and $32,598 for the years ended December
31, 1995, 1996 and 1997, respectively, and $32,598 and $93,750 for the nine
month periods ended September 30, 1997 and 1998, respectively.
F-13
<PAGE> 78
ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
LEASES
The Company leases office and other space and various office equipment
under various noncancelable leases. Future minimum annual lease payments,
exclusive of additional operating costs, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1998................................................... $221,372
1999................................................... 205,725
2000................................................... 205,352
2001................................................... 17,113
--------
$649,562
========
</TABLE>
Rent expense for the years ended December 31, 1995, 1996 and 1997 amounted
to approximately $117,100, $231,300 and $228,300, respectively, and for the nine
months ended September 30, 1997 and 1998 amounted to approximately $193,000 and
$196,500, respectively.
EMPLOYMENT CONTRACTS
The Company has employment agreements with all of its executive officers.
The agreements are generally one to three years in length and provide for
minimum salary levels. These agreements include severance payments under certain
conditions of approximately one half to three times each officer's annual
compensation. In addition the chief executive officer of the Company is entitled
to receive an annual incentive bonus of 3% of the Company's profits from
operations.
6. PROFIT SHARING PLAN
Effective October 1, 1995, the Company implemented a 401(k) profit sharing
plan for the benefit of all employees. Employees are eligible to participate
after twelve months of service and may contribute up to 15% of their
compensation subject to statutory limitations. The Company matches 50% of the
first 3% of compensation.
Profit sharing expense for the years ended December 31, 1995, 1996 and 1997
amounted to approximately $3,000, $7,000 and $8,500, respectively, and for the
nine months ended September 30, 1997 and 1998 amounted to approximately $6,000
and $7,000, respectively.
7. STOCKHOLDERS' EQUITY
PUBLIC OFFERING
In August 1998, the Company executed a letter of intent to proceed with a
proposed initial public offering of the Company's stock (the "IPO"). If the IPO
is consummated under the terms presently anticipated, the underwriters managing
the offering will have the right to appoint one member of the Board of Directors
after the closing of the IPO. The right to have a representative on the
Company's board extends for the term of the Warrant (defined below). The Company
has agreed to deliver a warrant (the "Warrant") to the underwriters at the
closing of the IPO equal to ten percent of the total number of shares sold
pursuant to the IPO. The Warrant is exercisable any time after one year from the
date of closing for a period of four years at a price equal to 120% of the
offering price per share. As of September 30, 1998, the Company had incurred
costs of $121,380 in connection with the IPO.
F-14
<PAGE> 79
ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
COMMON STOCK
At September 30, 1998 the Company had 19,000,000 authorized shares of
common stock, par value $.01, and 1,000,000 authorized shares of non-voting
common stock, par value $.01, of which 6,967,213 shares and 53,278 shares,
respectively, were outstanding. The non-voting common stock is convertible into
voting Common Stock on a one-for-one basis. Upon consummation of the Company's
proposed initial public offering, all shares of non-voting common stock will be
converted into shares of common stock.
In June 1998, the Company sold 53,278 shares of non-voting common stock and
the majority stockholder of the Company sold 409,836 shares of voting common
stock through private placements to foreign investors overseas based on
arms-length negotiations with unrelated parties. The shares were sold for $3.66
per share. Expenses incurred in connection with the private placements amounted
to $13,633. As a result, the Company received net proceeds of $181,367.
This stock was unregistered and was subject to restrictions on resale in
the United States pursuant to Regulation S promulgated under the Securities Act
of 1933, as amended. In the event of a public offering of the Company's stock,
the stockholders may request the Company to register such shares for inclusion
in the public offering. Such request is subject to certain limitations which may
be imposed by the managing underwriter of the Company's public offering. The
holders of the voting common stock have agreed, among other things, to vote the
shares in a manner consistent with any votes cast by the chairman of the
Company. This agreement will terminate upon consummation of the IPO.
On September 23, 1998, the Company sold 824,000 shares of voting common
stock for $5.00 per share through private placements to foreign investors.
Expenses incurred in connection with the private placements amounted to $85,753,
resulting in net proceeds of $4,034,247 being received by the Company. (See Note
8.)
The stock was unregistered and was subject to restrictions on resale in the
United States pursuant to Regulation S promulgated under the Securities Act of
1933, as amended. In the event of a public offering of the Company's stock, the
holders of 20% of the voting stock may request the Company to register such
shares for inclusion in the public offering. Such request is subject to certain
limitations which maybe imposed by the managing underwriter of the Company's
public offering. The holders of the stock have agreed, among other things, to
vote the shares in a manner consistent with any votes cast by the Chairman of
the Company. This agreement will terminate upon consummation of the IPO.
Subsequent to the sale of stock by the majority stockholder, the Company
received a loan of $500,000 from the stockholder. (See Note 3.)
STOCK OPTIONS
On April 1, 1998, the Company adopted the 1998 Equity Incentive Plan (the
"Plan") which provides for the issuance of both non-statutory and incentive
stock options to employees, officers, directors and consultants of the Company.
At that time the Company reserved 409,811 shares of common stock to be issued
under the Plan. Incentive stock options for 69,525 shares of common stock were
granted on May 1, 1998 with an initial exercise price of $3.66 per share, the
estimated fair market value on that date. The exercise price increases by $3.66
per share per quarter until the second anniversary of the date of grant at which
time the options are to expire.
F-15
<PAGE> 80
ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
On September 25, 1998, the Plan was amended to increase the shares reserved
for issuance under the Plan to a total of 1,200,000 shares; 761,476 shares of
voting common stock and 438,524 shares of non-voting common stock. All options
issued prior to June 30, 1998 were for voting common stock. Effective with the
amendment, the Company granted non-statutory stock options for 184,426 shares of
voting common stock and 362,701 shares of non-voting common stock with an
exercise price of $3.66 per share expiring on July 1, 1999. On June 30, 1998,
the Company also amended the terms of the incentive stock options issued to two
individuals on May 1, 1998 for a total of 32,884 shares of common stock to
provide that the exercise price for such options is to remain at $3.66 per share
over the life of the option.
All options presently granted under the Plan were immediately exercisable
on the grant date. The vesting of future option grants will be established by
the Company's Board of Directors or a duly authorized committee thereof.
A summary of the status of the Company's stock options as of September 30,
1998 and the changes during the period then ended is presented below.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
------- --------------
<S> <C> <C>
Outstanding at beginning of period................. -- $ --
Granted -- price equals fair value................. 616,652 3.73
Exercised.......................................... (26,083) 3.66
Canceled........................................... -- --
------- -----
Outstanding at end of period....................... 590,569 $3.73
======= =====
Options exercisable at end of period............... 590,569
=======
Options available for future grants................ 583,348
=======
</TABLE>
The following table summarizes information about stock options outstanding
at September 30, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AND EXERCISABLE
- ---------------------------------------------------------------------------
RANGE OF NUMBER WEIGHTED AVERAGE WEIGHTED-AVERAGE
EXERCISE PRICE OUTSTANDING REMAINING CONTRACTUAL LIFE EXERCISE PRICE
- -------------- ----------- -------------------------- ----------------
<S> <C> <C> <C>
$3.66-$7.32 590,569 .81 years $3.73
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its Plan. Compensation cost for the Company's
Plan determined consistent with Statement of Financial Accounting Standards No.
123 is not material to the Company's financial statements.
8. SUBSCRIPTIONS AND NOTES RECEIVABLE FROM STOCKHOLDERS
On September 23, 1998, the Company sold 824,000 shares of common stock for
net proceeds of $4,034,247. (See Note 7.) As of September 30, 1998, $895,000 of
this amount had not been received. In October, all amounts were subsequently
received.
In connection with the exercise of stock options on July 31, 1998, the
Company received notes receivable in the amount of $93,682. The notes are due in
biweekly installments through July 31, 2000 with interest at 9%.
F-16
<PAGE> 81
ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
NOTES TO FINANCIAL STATEMENTS -- (CONCLUDED)
9. ACCRUED EXPENSES
Accrued expenses at December 31, 1996 and 1997 and September 30, 1998
consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1996 1997 1998
------- ------- -------------
<S> <C> <C> <C>
Accrued salaries................................ $ 3,526 $ 3,657 $ 39,730
Accrued vacations............................... 14,288 13,089 23,523
Accrued and withheld payroll taxes.............. 17,876 56,082 3,409
Accrued professional fees....................... 15,500 15,000 --
Accrued interest on note payable to
officer/stockholder (Note 3).................. -- -- 12,740
Other accrued expenses.......................... 986 7,424 799
------- ------- --------
Total accrued expenses........................ $52,176 $95,252 $ 80,201
======= ======= ========
</TABLE>
10. SUBSEQUENT EVENTS
On October 1, 1998 the Company granted incentive stock options for 65,000
shares of common stock at an exercise price of $6.50 per share.
In connection with the future establishment of its European headquarters in
Luzern, Switzerland the Company transferred approximately $390,000 into an
escrow account in Switzerland on October 16, 1998.
F-17
<PAGE> 82
INSIDE BACK COVER
[Color work: "Alife-WebGuide[TM] 1.0 Professional" brand name appears
vertically on the left edge of the page. On the top center of the page reads
the heading "SmartBot[TM] Solutions for the Web." The top left corner of the
page discloses the following: "THE COMPANY HAS NOT RELEASED ANY OF ITS PRODUCTS
FOR COMMERCIAL SALE. THE COMPANY EXPECTS TO RELEASE ITS PRODUCTS FOR
COMMERCIAL SALE LATER IN 1998, 1999, AND 2000. THERE CAN BE NO ASSURANCE THAT
THE COMPANY WILL SUCCEED IN COMMERCIALIZING ITS PLANNED PRODUCTS." On the left
side of the page is the WebGuide[TM] product representative. To the right of
the representative are three screen shots of the Knowledge Editor. At the
bottom of the page, a graphic of the WebGuide[TM] CD-ROM is shown. Below the
illustration of the CD-ROM is a description of certain potential uses for the
WebGuide[TM].]
<PAGE> 83
------------------------------------------------------
------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDER OR ANY OF THE
UNDERWRITERS OR BY ANY OTHER PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY SECURITIES OTHER THAN
THE COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE
DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................ 3
Risk Factors.............................. 7
Use of Proceeds........................... 18
Dividend Policy........................... 18
Capitalization............................ 19
Dilution.................................. 20
Selected Financial Data................... 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 23
Business.................................. 30
Management................................ 43
Certain Transactions...................... 48
Principal, Selling and Registering
Stockholders............................ 49
Description of Capital Stock.............. 53
Shares Eligible for Future Sale........... 57
Underwriting.............................. 59
Legal Matters............................. 61
Experts................................... 61
Additional Information.................... 61
Index to Financial Statements............. F-1
</TABLE>
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
1,600,000 SHARES
ARTIFICIAL LIFE, INC.
COMMON STOCK
[ARTIFICIAL LIFE LOGO]
-----------------------
PROSPECTUS
-----------------------
NEW YORK BROKER, INC.
NEW YORK BROKER DEUTSCHLAND AG
, 1998
------------------------------------------------------
------------------------------------------------------
<PAGE> 84
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the Registrant's expenses in connection with
the issuance and distribution of the securities being registered. Except for the
SEC Registration Fee and the National Association of Securities Dealers, Inc.
("NASD") Filing Fee, the amounts listed below are estimates:
<TABLE>
<S> <C>
SEC registration fee........................................ $ 4,596
Nasdaq listing fee.......................................... 10,000
NASD filing fee............................................. 2,058
Blue Sky fees and expenses.................................. 13,000
Printing and engraving expenses............................. 130,000
Accounting fees and expenses................................ 60,000
Legal fees and expenses..................................... 450,000
Transfer agent and registrar fees and expenses.............. 5,000
Underwriters' non-accountable expense....................... 386,400
Miscellaneous............................................... 138,946
----------
Total............................................. $1,200,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Restated Certificate of Incorporation (the "Certificate of
Incorporation") provides that the Company shall indemnify to the fullest extent
authorized by the Delaware General Corporation Law ("DGCL"), each person who is
involved in any litigation or other proceeding because such person is or was a
director or officer of the Company or is or was serving as an officer or
director of another entity at the request of the Company, against all expense,
loss or liability reasonably incurred or suffered in connection therewith. The
Certificate of Incorporation provides that the right to indemnification includes
the right to be paid expenses incurred in defending any proceeding in advance of
its final disposition, provided, however, that such advance payment will only be
made upon delivery to the Company of an undertaking, by or on behalf of the
director or officer, to repay all amounts so advanced if it is ultimately
determined that such director is not entitled to indemnification. If the Company
does not pay a proper claim for indemnification in full within 60 days after a
written claim for such indemnification is received by the Company, the
Certificate of Incorporation and the Company's Bylaws authorize the claimant to
bring an action against the Company and prescribe what constitutes a defense to
such action.
Section 145 of the DGCL permits a corporation to indemnify any director or
officer of the corporation against expenses (including attorney's fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
in connection with any action, suit or proceeding brought by reason of the fact
that such person is or was a director or officer of the corporation, if such
person acted in good faith and in a manner that he reasonably believed to be in,
or not opposed to, the best interests of the corporation and, with respect to
any criminal action or proceeding, if he or she had no reason to believe his or
her conduct was unlawful. In a derivative action, (i.e., one brought by or on
behalf of the corporation), indemnification may be provided only for expenses
actually and reasonably incurred by any director or officer in connection with
the defense or settlement of such an action or suit if such person acted in good
faith and in a manner that he or she reasonably believed to be in, or not
opposed to, the best interests of the corporation, except that no
indemnification shall be provided if such person shall have been adjudged to be
liable to the corporation, unless and only to the extent that the court in which
the action or suit was
II-1
<PAGE> 85
brought shall determine that the defendant is fairly and reasonably entitled to
indemnity for such expenses despite such adjudication of liability.
Pursuant to Section 102(b)(7) of the DGCL, Article Tenth of the Certificate
of Incorporation eliminates the liability of a director to the Company or its
stockholders for monetary damages for such a breach of fiduciary duty as a
director, except for liabilities arising (i) from any breach of the director's
duty of loyalty to the Company or its stockholders, (ii) from acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the DGCL, or (iv) from any transaction from
which the director derived an improper personal benefit.
The Company intends to obtain insurance policies insuring the directors and
officers of the Company against certain liabilities that they may incur in their
capacity as directors and officers. Under such policies, the insurers, on behalf
of the Company, may also pay amounts for which the Company has granted
indemnification to the directors or officers.
Additionally, reference is made to the Underwriting Agreement filed as
Exhibit 1.1 hereto, which provides for indemnification by the Underwriters of
the Company, its directors and officers who sign the Registration Statement and
persons who control the Company, under certain circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In the three years preceding the filing of this Registration Statement, the
Company has sold the following securities that were not registered under the
Securities Act.
(a) Issuances of Capital Stock and Warrants
In November 1994 and April 1995, the Company issued and sold 10,000 and
40,000 shares of Common Stock, respectively (prior to a 340-for-1 stock split
effected in the form of a dividend of 339 shares for each share of the Company's
Common Stock beneficially owned on June 10, 1998 and a 1-for-2.44 reverse stock
split effected on September 22, 1998) to its sole stockholder for $10.00 per
share for total consideration of $100,000 and $400,000, respectively.
In June 1998, the Company issued and sold an aggregate of 130,000 shares of
Non-Voting Common Stock (prior to a 1-for-2.44 reverse stock split effected on
September 22, 1998) to two investors for $1.50 per share in a private placement
for aggregate gross proceeds of $195,000.
In September 1998, the Company issued and sold an aggregate of 824,000
shares of Common Stock to 23 investors for $5.00 per share in a private
placement for aggregate gross proceeds of $4,120,000.
(b) Certain Grants and Exercises of Stock Options
Pursuant to the 1998 Equity Incentive Plan, the Company had as of November
3, 1998 issued options to purchase an aggregate of 681,652 shares of Common
Stock. Options to purchase 26,083 shares of Common Stock pursuant to the
foregoing have been exercised at an exercise price of $3.66 per share and
options to purchase an aggregate of 655,569 shares of Common Stock are currently
outstanding and exercisable, at a weighted average exercise price of $4.06 per
share.
The sale and issuance of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, or Regulation D or Regulation S promulgated thereunder, or Rule
701 promulgated under Section 3(b) of the Securities Act, as transactions by an
issuer not involving a public offering or transactions pursuant to compensatory
benefit plans and contracts relating to compensation as provided under such Rule
701. The recipients of securities in each such transaction represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the share certificates and instruments
II-2
<PAGE> 86
issued in such transactions. All recipients had adequate access, through their
relationships with the Company, to information about the Registrant.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
*1.1 Form of Underwriting Agreement.
@3.1 Amended and Restated Certificate of Incorporation of the
Registrant.
3.1.1 Certificate of Amendment, dated October 29, 1998, to the
Amended and Restated Certificate of Incorporation of the
Registrant.
3.2 Form of Amended and Restated Certificate of Incorporation of
the Registrant to be filed upon consummation of this
Offering.
@3.3 Bylaws of the Registrant
3.4 Form of Restated Bylaws of the Registrant to become
effective upon consummation of this Offering.
*4.1 Specimen Common Stock Certificate.
*4.2 Form of Representatives' Warrant to be issued by the
Registrant to the Representatives upon consummation of the
Offering.
*5.1 Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo,
P.C. as to the legality of the shares being registered.
@10.1 Form of the Registrant's Employee Confidentiality and
Inventions Agreement.
@10.2 Form of Registrant's Advisory Board Confidentiality and
Inventions Agreement.
@10.3 Amended and Restated Executive Employment Agreement between
the Registrant and Eberhard Schoneburg, dated as of
September 1, 1998.
@10.4 Employment Agreement between the Registrant and Robert
Pantano, dated as of May 1, 1998.
@10.5 Employment Agreement between the Registrant and Klaus Kater,
dated as of May 1, 1998.
@10.6 Lease Agreement, dated February 6, 1995, between the
Registrant and Copley Place Associates Nominee Corporation.
@10.7 Lease Amendment No. 1, dated July 27, 1995, between the
Registrant and Copley Place Associates Nominee Corporation.
@10.8 Lease Amendment No. 2, dated February 27, 1997, between the
Registrant and Copley Place Associates Nominee Corporation.
@10.9 Consortium Agreement, dated October 10, 1995, between the
Registrant and Massachusetts Institute of Technology.
10.10 1998 Equity Incentive Plan.
@10.11 Form of Subscription Agreement, dated June 1998, between the
Registrant, Eberhard Schoneburg and the purchaser of
1,000,000 shares of Common Stock and the purchasers of an
aggregate of 130,000 shares of Non-Voting Common Stock.
@10.12 Form of Subscription Agreement dated September 23, 1998
between the Registrant and the purchasers of 824,000 shares
of Common Stock.
@10.13 Form of Amendment and Confidential Offering Supplement,
dated September 23, 1998.
23.1 Consent of Wolf & Company, P.C.
*23.2 Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo,
P.C. (See Exhibit 5.1).
@24.1 Power of attorney (included on the signature page hereto).
27.1 Financial Data Schedule
@99.1 Consent of Hartmut Bergmann
</TABLE>
- ---------------
@ Previously filed.
* To be filed by amendment.
II-3
<PAGE> 87
ITEM 17. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions described under "Item
14 -- Indemnification of Directors and Officers" above, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(b) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(c) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
(d) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement;"
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-4
<PAGE> 88
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has duly caused this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Boston,
Commonwealth of Massachusetts, on November 4, 1998.
ARTIFICIAL LIFE, INC.
By: /s/ EBERHARD SCHONEBURG
------------------------------------
Eberhard Schoneburg
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ EBERHARD SCHONEBURG President, Chief Executive November 4, 1998
- --------------------------------------------------- Officer and Chairman
Eberhard Schoneburg (Principal executive officer)
* Chief Financial Officer November 4, 1998
- --------------------------------------------------- (Principal financial and
Robert Pantano accounting officer)
* Director November 4, 1998
- ---------------------------------------------------
Bruno Gabriel
* Director November 4, 1998
- ---------------------------------------------------
Elmar Wohlgensinger
</TABLE>
* By executing his name hereto, Eberhard Schoneburg is signing this
document on behalf of the persons indicated above pursuant to powers of attorney
duly executed by such persons and filed with the Securities and Exchange
Commission.
By: /s/ EBERHARD SCHONEBURG
---------------------------------
Eberhard Schoneburg
(Attorney-in-Fact)
II-5
<PAGE> 89
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGES
- ----------- ----------- ------------
<C> <S> <C>
*1.1 Form of Underwriting Agreement..............................
@3.1 Amended and Restated Certificate of Incorporation of the
Registrant..................................................
3.1.1 Certificate of Amendment, dated October 29, 1998, to the
Amended and Restated Certificate of Incorporation of the
Registrant.
3.2 Form of Amended and Restated Certificate of Incorporation of
the Registrant to be filed upon consummation of this
Offering....................................................
@3.3 Bylaws of the Registrant....................................
3.4 Form of Restated Bylaws of the Registrant to become
effective upon consummation of this Offering................
*4.1 Specimen Common Stock Certificate...........................
*4.2 Form of Representatives' Warrant to be issued by the
Registrant to the Representatives upon consummation of the
Offering
*5.1 Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo,
P.C. as to the legality of the shares being registered......
@10.1 Form of the Registrant's Employee Confidentiality and
Inventions Agreement........................................
@10.2 Form of Registrant's Advisory Board Confidentiality and
Inventions Agreement........................................
@10.3 Amended and Restated Executive Employment Agreement between
the Registrant and Eberhard Schoneburg, dated as of
September 1, 1998...........................................
@10.4 Employment Agreement between the Registrant and Robert
Pantano, dated as of May 1, 1998............................
@10.5 Employment Agreement between the Registrant and Klaus Kater,
dated as of May 1, 1998.....................................
@10.6 Lease Agreement, dated February 6, 1995, between the
Registrant and Copley Place Associates Nominee
Corporation.................................................
@10.7 Lease Amendment No. 1, dated July 27, 1995, between the
Registrant and Copley Place Associates Nominee
Corporation.................................................
@10.8 Lease Amendment No. 2, dated February 27, 1997, between the
Registrant and Copley Place Associates Nominee
Corporation.................................................
@10.9 Consortium Agreement, dated October 10, 1995, between the
Registrant and Massachusetts Institute of Technology........
10.10 1998 Equity Incentive Plan..................................
@10.11 Form of Subscription Agreement, dated June 1998, between the
Registrant, Eberhard Schoneburg and the purchaser of
1,000,000 shares of Common Stock and the purchasers of an
aggregate of 130,000 shares of Non-Voting Common Stock......
@10.12 Form of Subscription Agreement, dated September 23, 1998,
between the Registrant and the purchasers of 824,000 shares
of Common Stock.............................................
@10.13 Form of Amendment and Confidential Offering Supplement,
dated September 23, 1998....................................
23.1 Consent of Wolf & Company, P.C. ............................
*23.2 Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo,
P.C. (See Exhibit 5.1)......................................
@24.1 Power of attorney (included on the signature page hereto)...
27.1 Financial Data Schedule.....................................
@99.1 Consent of Hartmut Bergmann.................................
</TABLE>
- ---------------
@ Previously filed.
* To be filed by amendment.
<PAGE> 1
EXHIBIT 3.1.1
CERTIFICATE OF AMENDMENT
TO THE
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
ARTIFICIAL LIFE, INC.
It is hereby certified that:
FIRST: The name of the corporation is Artificial Life, Inc., (the
"Corporation").
SECOND: That the Amended and Restated Certificate of Incorporation of the
Corporation be further amended by deleting Article FOURTH, Section 5
thereof in its entirety and by substituting in lieu thereof the
following:
"5. AUTOMATIC CONVERSION. Each share of Non-voting Common
Stock shall automatically be converted into one share of
Voting Common Stock upon the closing of a firm commitment
underwritten public offering pursuant to an effective
registration statement under the Securities Act of 1933, as
amended, covering the offer and sale of Common Stock for the
account of the Corporation to the public with gross proceeds
to the Corporation of not less than $5,000,000 and where the
Corporation will thereafter be listed on the Nasdaq SmallCap
Market System, the Nasdaq National Market System, the New
York Stock Exchange or the American Stock Exchange."
THIRD: The amendment of the Amended and Restated Certificate of
Incorporation, as amended, herein certified has been duly adopted and
written consent has been given in accordance with the provisions of
Sections 228 and 242 of the General Corporation Law of the State of
Delaware. Prompt written notice of the adoption of the amendment
herein certified has been given to those stockholders who have not
consented in writing thereto, as provided in Section 228 of the
General Corporation Law of the State of Delaware.
EXECUTED, effective as of the 29th day of October 1998.
ARTIFIICIAL LIFE, INC.
By: /s/ Eberhard Schoneburg
------------------------------
Eberhard Schoneburg, President
<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
ARTIFICIAL LIFE, INC.
Adopted in accordance with the
provisions of Sections 242 and 245
of the General Corporation Law of the State of Delaware
-------------------------------------------------------
Artificial Life, Inc., a Delaware corporation, hereby certifies as follows:
1. The name of the corporation is Artificial Life, Inc. (formerly known
as Neurotec International Corp.). The date of the filing of its original
Certificate of Incorporation with the Secretary of State of the State of
Delaware was November 15, 1994.
2. This Amended and Restated Certificate of Incorporation amends and
restates the provisions of the Certificate of Incorporation of said corporation
and was duly adopted pursuant to resolutions adopted by the Board of Directors
and stockholders of the corporation in accordance with the provisions of
Sections 242 and 245 of the General Corporation Law of the State of Delaware
(the "Delaware General Corporation Law"). In lieu of a meeting and vote of the
stockholders, the holders of the necessary number of shares of the corporation's
capital stock have given written consent to said amendment and restatement in
accordance with the provisions of Section 228 of the Delaware General
Corporation Law, and said written consent was filed with the corporation and
notice thereof has been given to those Stockholders who have not consented in
writing.
3. The text of the Certificate of Incorporation is hereby amended and
restated to read in its entirety as follows:
FIRST: The name of the corporation is Artificial Life, Inc. (the
"Corporation").
SECOND: The address of the registered office of the Corporation in the
State of Delaware is 1013 Centre Road, City of Wilmington, County of New Castle;
and the name of the registered agent of the Corporation in the State of Delaware
is The Prentice-Hall Corporation System, Inc.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity or carry on any business for which corporations may be organized under
the Delaware General Corporation Law or any successor statue.
FOURTH:
A. DESIGNATION AND NUMBER OF SHARES.
The total number of shares of all classes of stock which the Corporation
shall have the authority to issue is 35,000,000 shares, consisting of 30,000,000
shares of common stock, par value $.01 per share (the "Common Stock"), and
5,000,000 shares of preferred stock, par value $.01 per share (the "Preferred
Stock").
<PAGE> 2
A statement of the designations of the different classes of stock of the
Corporation and of the powers, preferences and rights, and the qualifications,
limitations or restrictions thereof, and of the authority conferred upon the
Board of Directors to fix by resolution or resolutions any of the foregoing in
connection with the creation of one or more series of Preferred Stock and the
limitation of variations between or among such series, is set forth below in
this Article FOURTH.
B. PREFERRED STOCK
1. Shares of Preferred Stock may be issued in one or more series at
such time or times and for such consideration as the Board of Directors may
determine.
2. Authority is hereby expressly granted to the Board of Directors
to fix from time to time, by resolution or resolutions providing for the
establishment and/or issuance of any series of Preferred Stock, the designation
of such series and the powers, preferences and rights of the shares of such
series, and the qualifications, limitations or restrictions thereof, to the
fullest extent such authority may be conferred upon the Board of Directors under
the Delaware General Corporation Law, including, without limitation, the
authority to fix the following:
(a) The distinctive designation and number of shares comprising such
series, which number may (except where otherwise provided by the Board of
Directors in creating such series) be increased or decreased (but not below
the number of shares then outstanding) from time to time by action of the
Board of Directors;
(b) The rate of dividends, if any, on the shares of that series,
whether dividends shall be (i) non-cumulative, (ii) cumulative to the
extent earned or (iii) cumulative (and, if cumulative, from which date or
dates), whether dividends shall be payable in cash, property or rights, or
in shares of the Corporation's capital stock, and the relative rights of
priority, if any, of payment of dividends on shares of that series over
shares of any other series or class;
(c) Whether the shares of that series shall be redeemable and, if so,
the terms and conditions of such redemption, including the date or dates
upon or after which they shall be redeemable, and the amount per share
payable in case of redemption (which amount may vary under different
conditions and at different redemption dates) or the property or rights,
including securities of any other corporation, payable in case of
redemption;
(d) Whether the series shall have a sinking fund for the redemption
or purchase of shares of that series and, if so, the terms and amounts
payable into such sinking fund;
(e) The rights to which the holders of the shares of that series
shall be entitled in the event of the voluntary or involuntary liquidation,
dissolution or winding-up of the Corporation, and the relative rights of
priority, if any, of payment of shares of that series in any such event;
(f) Whether the shares of that series shall be convertible into or
exchangeable for shares of stock of any other class or any other series
and, if so, the terms and conditions of such conversion or exchange,
including the rate or rates of conversion or exchange, the date or dates
upon or after which they shall be convertible or exchangeable, the period
or periods during
2
<PAGE> 3
which they shall be convertible or exchangeable, the event or events upon
or after which they shall be convertible or exchangeable or at whose option
they shall be convertible or exchangeable, and the method (if any) of
adjusting the rates of conversion or exchange in the event of a stock
split, stock dividend, combination of shares or similar event;
(g) Whether the issuance of any additional shares of such series, or
of any shares of any other series, shall be subject to restrictions as to
issuance, or as to the powers, preferences or rights of any such additional
shares of such series or shares of such other series;
(h) Whether or not the shares of that series shall have voting
rights, the extent of such voting rights on specified matters or on all
matters, the number of votes to which the holder of a share of such series
shall be entitled in respect of such share, whether such series shall vote
generally with the Common Stock on all matters or (either generally or upon
the occurrence of specified circumstances) shall vote separately as a class
or with other series of Preferred Stock; and
(i) Any other preferences, privileges and powers and relative,
participating, optional or other special rights and qualifications,
limitations or restrictions of such series, as the Board of Directors may
deem advisable and as shall not be inconsistent with the provisions of this
Amended and Restated Certificate of Incorporation and to the full extent
now or hereafter permitted by the Delaware General Corporation Law.
C. COMMON STOCK.
The relative powers, preferences, rights, qualifications, limitations and
restrictions of the shares of the Common Stock are as follows:
1. DIVIDENDS. Subject to the preferential rights, if any, of the
Preferred Stock, the holders of shares of Common Stock shall be entitled to
receive, when and if declared by the Board of Directors, out of the assets of
the Corporation which are by law available therefor, dividends payable either in
cash, in property, or in shares of Common Stock.
2. LIQUIDATION. In the event of any liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, after payment
or provision for payment of the debts and other liabilities of the Corporation
and the amounts to which the holders of any Preferred Stock shall be entitled,
the holders of Common Stock shall be entitled to share ratably in the remaining
assets of the Corporation.
3. VOTING. The holders of the Common Stock are entitled to one vote
for each share held. There shall be no cumulative voting.
FIFTH: The Corporation is to have perpetual existence.
SIXTH: The following provisions are inserted for the management of the
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its directors and stockholders:
3
<PAGE> 4
A. The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors. In addition to the powers and
authority expressly conferred upon them by statute or by this Amended and
Restated Certificate of Incorporation or the Bylaws of the Corporation as in
effect from time to time, the directors are hereby empowered to exercise all
such powers and do all such acts and things as may be exercised or done by the
Corporation.
B. The directors of the Corporation need not be elected by written ballot
unless the Bylaws so provide.
C. Any action required or permitted to be taken by the stockholders of
the Corporation may be effected only at a duly called annual or special meeting
of stockholders of the Corporation and not by written consent.
D. Special meetings of the stockholders may only be called by the Board
of Directors.
SEVENTH: A. Subject to the rights of the holders of shares of any series of
Preferred Stock then outstanding to elect additional directors under specified
circumstances, the number of directors shall be fixed from time to time
exclusively by the Board of Directors pursuant to a resolution adopted by a
majority of the Board of Directors.
B. The Board of Directors of the Corporation shall be divided into three
classes, as nearly equal in number as reasonably possible, with the term of
office of the first class to expire at the 1999 annual meeting of stockholders
or any special meeting in lieu thereof, the term of office of the second class
to expire at the 2000 annual meeting of stockholders or any special meeting in
lieu thereof, and the term of office of the third class to expire at the 2001
annual meeting of stockholders or any special meeting in lieu thereof. At each
annual meeting of stockholders or special meeting in lieu thereof following such
initial classification, directors elected to succeed those directors whose terms
expire shall be elected for a term of office to expire at the third succeeding
annual meeting of stockholders or special meeting in lieu thereof after their
election and until their successors are duly elected and qualified.
C. Subject to the rights of the holders of any series of Preferred Stock
then outstanding, newly created directorships resulting from any increase in the
authorized number of directors or any vacancies in the Board of Directors
resulting from death, resignation, retirement, disqualification, removal from
office or other cause may be filled only by a majority vote of the directors
then in office even though less than a quorum, or by a sole remaining director.
In the event of any increase or decrease in the authorized number of directors,
(i) each director then serving as such shall nevertheless continue as a director
of the class of which he is a member until the expiration of his current term or
his prior death, retirement, removal or resignation and (ii) the newly created
or eliminated directorships resulting from such increase or decrease shall if
reasonably possible be apportioned by the Board of Directors among the three
classes of directors so as to ensure that no one class has more than one
director more than any other class. To the extent reasonably possible,
consistent with the foregoing rule, any newly created directorships shall be
added to those classes whose terms of office are to expire at the latest dates
following such allocation and newly eliminated directorships shall be subtracted
from those classes whose terms of office are to expire at the earliest dates
following such allocation, unless otherwise provided for from time to time by
resolution adopted by a majority of the directors then in office, although less
than a quorum.
4
<PAGE> 5
D. Advance notice of stockholder nominations for the election of
directors and of business to be brought by stockholders before any meeting of
the stockholders of the Corporation shall be given in the manner provided in the
Bylaws of the Corporation.
E. Subject to the rights of the holders of any series of Preferred Stock
then outstanding, so long as Eberhard Schoneburg owns (whether directly or
beneficially) at least a majority of the outstanding shares of capital stock
then entitled to vote at an election of the directors, any director, or the
entire Board of Directors, may be removed from office at any time with or
without cause by the affirmative vote of the holders of a majority of the
outstanding shares of capital stock then entitled to vote at an election of the
directors. If at any time Eberhard Schoneburg shall cease to own (whether
directly or beneficially) at least a majority of the outstanding shares of
capital stock then entitled to vote at an election of the directors, any
director, or the entire Board of Directors, may be removed from office at any
time only for cause by the affirmative vote of the holders of a majority of the
outstanding shares of capital stock then entitled to vote at an election of the
directors. A director may be removed for cause only after a reasonable notice
and opportunity to be heard by the stockholders.
EIGHTH: The Board of Directors is expressly empowered to adopt, amend or
repeal Bylaws of the Corporation. Any adoption, amendment or repeal of the
Bylaws of the Corporation by the Board of Directors shall require the approval
of a majority of the Board of Directors. The stockholders shall also have power
to adopt, amend or repeal the Bylaws of the Corporation; PROVIDED, that in
addition to any vote of the holders of any class or series of stock of the
Corporation required by law or by this Amended and Restated Certificate of
Incorporation, the affirmative vote of the holders of at least seventy percent
(70%) of the voting power of all of the then outstanding shares of the capital
stock of the Corporation entitled to vote generally in the election of
directors, voting together as a single class, shall be required for the
stockholders to adopt, amend or repeal any provision of the Bylaws of the
Corporation.
NINTH: A. To the fullest extent permitted by the Delaware General
Corporation Law as the same now exists or may hereafter be amended, the
Corporation shall indemnify, and advance expenses to, its directors and officers
and to any person who is or was serving at the request of the Corporation as a
director, officer, trustee, employee or agent of another corporation, or of a
partnership, joint venture, trust or other enterprise, if such person was or is
made a party to or is threatened to be made a party to or is otherwise involved
(including, without limitation, as a witness) in any action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that such person is or was a director or officer of the Corporation or is or was
serving at the request of the Corporation as a director, officer, trustee,
employee or agent of another corporation, or of a partnership, joint venture,
trust or other enterprise, including service with respect to an employee benefit
plan; PROVIDED, that except with respect to proceedings to enforce rights to
indemnification or as is otherwise required by law, the Bylaws of the
Corporation may provide that the Corporation shall not be required to indemnify,
and advance expenses to, any director, officer or other person in connection
with a proceeding (or part thereof) initiated by such director, officer or other
person, unless such proceeding (or part thereof) was authorized by the Board of
Directors and shall be made only upon delivery to the Corporation of an
undertaking, by or on behalf of such person, to repay all amounts so advanced if
it shall ultimately be determined by final judicial decision from which there is
no further right to appeal that such person is not entitled to be indemnified
for such expenses under this Article NINTH or otherwise. The Corporation, by
action of its Board of Directors, may provide
5
<PAGE> 6
indemnification or advance expenses to employees and agents of the Corporation
or other persons only on such terms and conditions and to the extent determined
by the Board of Directors in its sole and absolute discretion.
B. The indemnification and advancement of expenses provided by, or
granted pursuant to, this Article NINTH shall not be deemed exclusive of any
other rights to which a person seeking indemnification or advancement of
expenses may be entitled under any By-Law, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in such person's
official capacity and as to action in another capacity while holding such
office.
C. The Corporation shall have the power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, trustee, employee or agent of another corporation, or of
a partnership, joint venture, trust or other enterprise, against any liability
asserted against such person and incurred by such person in any such capacity,
or arising out of such person's status as such, whether or not the Corporation
would have the power to indemnify such person against such liability under this
Article NINTH.
D. The indemnification and advancement of expenses provided by, or
granted pursuant to, this Article NINTH shall, unless otherwise specified when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such person. The indemnification and rights to
advancement of expenses that may have been provided to an employee or agent of
the Corporation by action of the Board of Directors, pursuant to the last
sentence of paragraph 1 of this Article NINTH, shall, unless otherwise specified
when authorized or ratified, continue as to a person who has ceased to be an
employee or agent of the Corporation and shall inure to the benefit of the
heirs, executors and administrators of such person, after the time such person
has ceased to be an employee or agent of the Corporation, only on such terms and
conditions and to the extent determined by the Board of Directors in its sole
and absolute discretion. No repeal or amendment of this Article NINTH shall
adversely affect any rights of any person pursuant to this Article NINTH which
existed at the time of such repeal or amendment with respect to acts or
omissions occurring prior to such repeal or amendment.
TENTH: No director shall be personally liable to the Corporation or its
stockholders for any monetary damages for breaches of fiduciary duty as a
director, notwithstanding any provision of law imposing such liability; provided
that this provision shall not eliminate or limit the liability of a director, to
the extent that such liability is imposed by applicable law, (i) for any breach
of the director's duty of loyalty to the Corporation or its stockholders; (ii)
for acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law; (iii) under Section 174 or successor provisions
of the Delaware General Corporation Law; or (iv) for any transaction from which
the director derived an improper personal benefit. This provision shall not
eliminate or limit the liability of a director for any act or omission if such
elimination or limitation is prohibited by the Delaware General Corporation Law.
No amendment to or repeal of this provision shall apply to or have any effect on
the liability or alleged liability of any director for or with respect to any
acts or omissions of such director occurring prior to such amendment or repeal.
If the Delaware General Corporation Law is amended to authorize corporate action
further eliminating or limiting the personal liability of directors, then the
liability of a director of the Corporation shall be eliminated or limited to the
fullest extent permitted by the Delaware General Corporation Law, as so amended.
6
<PAGE> 7
ELEVENTH: The Corporation reserves the right to amend or repeal any
provision contained in this Amended and Restated Certificate of Incorporation in
the manner prescribed by the Delaware General Corporation Law and all rights
conferred upon stockholders are granted subject to this reservation; PROVIDED
that in addition to the vote of the holders of any class or series of stock of
the Corporation required by law or by this Amended and Restated Certificate of
Incorporation, the affirmative vote of the holders of shares of voting stock of
the Corporation representing at least seventy percent (70%) of the voting power
of all of the then outstanding shares of the capital stock of the Corporation
entitled to vote generally in the election of directors, voting together as a
single class, shall be required to (i) reduce the number of authorized shares of
Common Stock or the number of authorized shares of Preferred Stock set forth in
Article FOURTH or (ii) amend, alter or repeal, or adopt any provision
inconsistent with, Articles SIXTH, SEVENTH, EIGHTH, NINTH, TENTH, and this
Article ELEVENTH of this Amended and Restated Certificate of Incorporation.
TWELFTH: Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of the Delaware General Corporation Law or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this Corporation under the provisions of Section 279 of the Delaware General
Corporation Law, order a meeting of the creditors or class of creditors, and/or
of the stockholders or class of stockholders of this Corporation, as the case
may be, to be summoned in such manner as the said court directs. If a majority
in number representing three-fourths (3/4) in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this Corporation, as the case may be,
and also on this Corporation.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
signed by its President and Chief Executive Officer this ___th day of December,
1998.
ARTIFICIAL LIFE, INC.
By: _________________________________________
Eberhard Schoneburg
Its President and Chief Executive Officer
7
<PAGE> 1
EXHIBIT 3.4
ARTIFICIAL LIFE, INC.
RESTATED BYLAWS
ARTICLE I - STOCKHOLDERS
Section 1. Annual Meeting.
An annual meeting of the stockholders, for the election of directors to
succeed those whose terms expire and for the transaction of such other business
as may properly come before the meeting, shall be held at such place, on such
date, and at such time as the Board of Directors shall fix each year.
Section 2. Special Meetings.
Subject to the rights of the holders of any class or series of preferred
stock of the Corporation, special meetings of stockholders of the Corporation
may be called only by the Board of Directors pursuant to a resolution adopted by
a majority of the total number of directors authorized. Special meetings of the
stockholders may be held at such place within or without the State of Delaware
as may be stated in such resolution.
Section 3. Notice of Meetings.
Written notice of the place, date, and time of all meetings of the
stockholders shall be given, not less than ten (10) nor more than sixty (60)
days before the date on which the meeting is to be held, to each stockholder
entitled to vote at such meeting, except as otherwise provided herein or
required by law (meaning, here and hereinafter, as required from time to time by
the Delaware General Corporation Law or the Certificate of Incorporation of the
Corporation, as amended and restated from time to time).
When a meeting is adjourned to another place, date or time, written notice
need not be given of the adjourned meeting if the place, date and time thereof
are announced at the meeting at which the adjournment is taken; provided,
however, that if the date of any adjourned meeting is more than thirty (30) days
after the date for which the meeting was originally noticed, or if a new record
date is fixed for the adjourned meeting, written notice of the place, date, and
time of the adjourned meeting shall be given in conformity herewith. At any
adjourned meeting, any business may be transacted which might have been
transacted at the original meeting.
Section 4. Quorum.
At any meeting of the stockholders, the holders of a majority of all of the
shares of the stock entitled to vote at the meeting, present in person or by
proxy, shall constitute a quorum for all purposes, unless or except to the
extent that the presence of a larger number may be required by law. Where a
separate vote by a class or classes is required, a majority of the shares of
such
-1-
<PAGE> 2
class or classes present in person or represented by proxy shall constitute a
quorum entitled to take action with respect to that vote on that matter.
If a quorum shall fail to attend any meeting, the chairman of the meeting
or the holders of a majority of the shares of stock entitled to vote who are
present, in person or by proxy, may adjourn the meeting to another place, date,
or time.
Section 5. Organization.
The Chairman of the Board of Directors or, in his or her absence, such
person as the Board of Directors may have designated or, in his or her absence,
the Chief Executive Officer of the Corporation or, in his or her absence, the
President or, in his or her absence such person as may be chosen by the holders
of a majority of the shares entitled to vote who are present, in person or by
proxy, shall call to order any meeting of the stockholders and act as chairman
of the meeting. In the absence of the Secretary of the Corporation, the
secretary of the meeting shall be such person as the chairman of the meeting
appoints.
Section 6. Conduct of Business.
The Chairman of the Board of Directors or his or her designee or, if
neither the Chairman of the Board nor his or her designee is present at the
meeting, then a person appointed by a majority of the Board of Directors, shall
preside at, and act as chairman of, any meeting of the stockholders. The
chairman of any meeting of stockholders shall determine the order of business
and the procedures at the meeting, including such regulation of the manner of
voting and the conduct of discussion as he or she deems to be appropriate.
Section 7. Notice of Stockholder Business and Nominations.
A. Annual Meetings of Stockholders.
Nominations of persons for election to the Board of Directors and the
proposal of business to be considered by the stockholders may be made at an
annual meeting of stockholders (a) pursuant to the Corporation's notice of
meeting, (b) by or at the direction of the Board of Directors or (c) by any
stockholder of the Corporation who was a stockholder of record at the time of
giving of notice provided for in this Section, who is entitled to vote at the
meeting and who complies with the notice procedures set forth in this Section.
B. Special Meetings of Stockholders.
Only such business shall be conducted at a special meeting of stockholders
as shall have been brought before the meeting pursuant to the notice of meeting
given pursuant to Section 2 above. Nominations of persons for election to the
Board of Directors may be made at a special meeting of stockholders at which
directors are to be elected (a) by or at the direction of the Board of Directors
or (b) provided that the Board of Directors has determined that directors shall
be elected at such meeting, by any stockholder of the Corporation who is a
stockholder of record at the time of giving of notice of the special meeting,
who shall be entitled to vote at the meeting and who complies with the notice
procedures set forth in this Section.
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C. Certain Matters Pertaining to Stockholder Business and Nominations.
(1) For nominations or other business to be properly brought before an
annual meeting by a stockholder pursuant to clause (c) of paragraph A of this
Section or a special meeting pursuant to paragraph B of this Section, the
stockholder must have given timely notice thereof in writing to the Secretary of
the Corporation and such other business must otherwise be a proper matter for
stockholder action. To be timely, a stockholder's notice pertaining to an annual
meeting shall be delivered to the Secretary at the principal executive offices
of the Corporation not later than the close of business on the sixtieth (60) day
nor earlier than the close of business on the ninetieth (90th) day prior to the
first anniversary of the preceding year's annual meeting; PROVIDED, HOWEVER,
that in the event that the date of the annual meeting is more than thirty (30)
days before or more than sixty (60) days after such an anniversary date, notice
by the stockholder to be timely must be so delivered not earlier than the close
of business on the ninetieth (90) day prior to such annual meeting and not later
than the close of business on the later of the sixtieth (60th) day prior to such
annual meeting or the close of business on the tenth (10th) day following the
day on which public announcement of the date of such meeting is first made by
the Corporation. Such stockholder's notice for an annual meeting or a special
meeting shall set forth: (a) as to each person whom the stockholder proposes to
nominate for election or reelection as a director, all information relating to
such person that is required to be disclosed in solicitations of proxies for
election of directors, or is otherwise required, in each case, pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") (including such person's written consent to being named in the
proxy statement as a nominee and to serving as a director if elected); (b) as to
any other business that the stockholder proposes to bring before the meeting, a
brief description of the business desired to be brought before the meeting, the
reasons for conducting such business at the meeting and any material interest in
such business of such stockholder and the beneficial owner, if any, on whose
behalf the proposal is made; and (c) as to the stockholder giving the notice and
the beneficial owner, if any, on whose behalf the nomination or proposal is made
(i) the name and address of such stockholder, as they appear on the
Corporation's books, and of such beneficial owner and (ii) the class and number
of shares of the Corporation that are owned beneficially and held of record by
such stockholder and such beneficial owner. A stockholder shall also comply with
all applicable requirements of the Exchange Act (or any successor provision),
and the rules and regulations thereunder with respect to the matters set forth
in these Bylaws.
(2) Notwithstanding anything in the second sentence of paragraph C(1)
of this Section to the contrary, in the event that the number of directors to be
elected to the Board of Directors of the Corporation is increased and there is
no public announcement by the Corporation naming all of the nominees for
director or specifying the size of the increased Board of Directors at least
seventy (70) days prior to the first anniversary of the preceding year's annual
meeting (or, if the annual meeting is held more than thirty (30) days before or
sixty (60) days after such anniversary date, at least seventy (70) days prior to
such annual meeting), a stockholder's notice required by this Section shall also
be considered timely, but only with respect to nominees for any new positions
created by such increase, if it shall be delivered to the Secretary at the
principal executive office of the Corporation not later than the close of
business on the tenth (10th) day following the day on which such public
announcement is first made by the Corporation.
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(3) In the event the Corporation calls a special meeting of
stockholders for the purpose of electing one or more directors to the Board of
Directors, any such stockholder may nominate a person or persons (as the case
may be), for election to such position(s) as specified in the Corporation's
notice of meeting, if the stockholder's notice required by paragraph C(1) of
this Section shall be delivered to the Secretary at the principal executive
offices of the Corporation not earlier than the ninetieth (90th) day prior to
such special meeting nor later than the close of business on the later of the
sixtieth (60th) day prior to such special meeting, or the tenth (10th) day
following the day on which public announcement is first made of the date of the
special meeting and of the nominees proposed by the Board of Directors to be
elected at such meeting.
D. General.
(1) Only such persons who are nominated in accordance with the
procedures set forth in this Section shall be eligible to serve as directors and
only such business shall be conducted at a meeting of stockholders as shall have
been brought before the meeting in accordance with the procedures set forth in
this Section. Except as otherwise provided by law or these Bylaws, the chairman
of the meeting shall have the power and duty to determine whether a nomination
or any business proposed to be brought before the meeting was made or proposed,
as the case may be, in accordance with the procedures set forth in this Section
and, if any proposed nomination or business is not in compliance herewith, to
declare that such defective proposal or nomination shall be disregarded.
(2) For purposes of this Section, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the
Corporation with the Securities and Exchange Commission pursuant to Section 13,
14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this Section, a
stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth herein. Nothing in this Section shall be deemed to affect any rights (i)
of stockholders to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act or (ii) of the holders
of any series of Preferred Stock to elect directors under specified
circumstances.
Section 8. Proxies and Voting.
At any meeting of the stockholders, every stockholder entitled to vote
may vote in person or by proxy authorized by an instrument in writing or by a
transmission permitted by law filed in accordance with the procedure established
for the meeting. Any copy, facsimile telecommunication or other reliable
reproduction of the writing or transmission created pursuant to this Section may
be substituted or used in lieu of the original writing or transmission for any
and all purposes for which the original writing or transmission could be used,
provided that such copy, facsimile telecommunication or other reproduction shall
be a complete reproduction of the entire original writing or transmission.
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All voting, including on the election of directors but excepting where
otherwise required by law, may be by voice vote. Any vote not taken by voice
shall be taken by ballots, each of which shall state the name of the stockholder
or proxy voting and such other information as may be required under the
procedure established for the meeting. The Corporation may, and to the extent
required by law, shall, in advance of any meeting of stockholders, appoint one
or more inspectors to act at the meeting and make a written report thereof. The
Corporation may designate one or more persons as alternate inspectors to replace
any inspector who fails to act. If no inspector or alternate is able to act at a
meeting of stockholders, the person presiding at the meeting may, and to the
extent required by law, shall, appoint one or more inspectors to act at the
meeting. Each inspector, before entering upon the discharge of his duties, shall
take and sign an oath faithfully to execute the duties of inspector with strict
impartiality and according to the best of his ability.
Except as otherwise provided in the terms of any class or series of
Preferred Stock of the Corporation, all elections at any meeting of stockholders
shall be determined by a plurality of the votes cast, and except as otherwise
required by law, all other matters determined by stockholders at a meeting shall
be determined by a majority of the votes cast affirmatively or negatively.
Section 9. No Action Without Meeting.
Any action required or permitted to be taken by the stockholders of the
Corporation may be effected only at a duly called annual or special meeting of
stockholders of the Corporation and may not be effected by written consent.
Section 10. Stock List.
A complete list of stockholders entitled to vote at any meeting of
stockholders, arranged in alphabetical order for each class of stock and showing
the address of each such stockholder and the number of shares registered in his
or her name, shall be open to the examination of any such stockholder, for any
purpose germane to the meeting, during ordinary business hours for a period of
at least ten (10) days prior to the meeting, either at a place within the city
where the meeting is to be held, which place shall be specified in the notice of
the meeting, or if not so specified, at the place where the meeting is to be
held.
The stock list shall also be kept at the place of the meeting during the
whole time thereof and shall be open to the examination of any such stockholder
who is present. Such list shall presumptively determine the identity of the
stockholders entitled to vote at the meeting and the number of shares held by
each of them.
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ARTICLE II - BOARD OF DIRECTORS
Section 1. General Powers, Number, Election, Tenure and Qualification.
A. The business and affairs of the Corporation shall be managed by or
under the direction of its Board of Directions.
B. Subject to the rights of the holders of any series of Preferred Stock
then outstanding to elect additional directors under specified circumstances,
the number of directors shall be fixed from time to time exclusively by the
Board of Directors pursuant to a resolution adopted by a majority of the Board.
C. The Board of Directors of the Corporation shall be divided into three
classes, as nearly equal in number as reasonably possible, with the term of
office of the first class to expire at the annual meeting of stockholders or any
special meeting in lieu thereof in 1999, the term of office of the second class
to expire at the annual meeting of stockholders or any special meeting in lieu
thereof in 2000, and the term of office of the third class to expire at the
annual meeting of stockholders or any special meeting in lieu thereof in 2001.
At each annual meeting of stockholders or special meeting in lieu thereof
following such initial classification, directors elected to succeed those
directors whose terms expire shall be elected for a term of office to expire at
the third succeeding annual meeting of stockholders or special meeting in lieu
thereof after their election and until their successors are duly elected and
qualified.
Section 2. Vacancies and Newly Created Directorships.
Subject to the rights of the holders of any series of Preferred Stock then
outstanding, newly created directorships resulting from any increase in the
authorized number of directors or any vacancies in the Board of Directors
resulting from death, resignation, retirement, disqualification, removal from
office or other cause may be filled only by a majority vote of the directors
then in office even though less than a quorum, or by a sole remaining director.
In the event of any increase or decrease in the authorized number of directors,
(i) each director then serving as such shall nevertheless continue as a director
of the class of which he is a member until the expiration of his current term or
his prior death, retirement, removal or resignation and (ii) the newly created
or eliminated directorships resulting from such increase or decrease shall if
reasonably possible be apportioned by the Board of Directors among the three
classes of directors so as to ensure that no one class has more than one
director more than any other class. To the extent reasonably possible,
consistent with the foregoing rule, any newly created directorships shall be
added to those classes whose terms of office are to expire at the latest dates
following such allocation and newly eliminated directorships shall be subtracted
from those classes whose terms of office are to expire at the earliest dates
following such allocation, unless otherwise provided for from time to time by
resolution adopted by a majority of the directors then in office, although less
than a quorum. In the event of a vacancy in the Board of Directors, the
remaining directors, except as otherwise provided by law, may exercise the
powers of the full Board of Directors until the vacancy is filled.
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Section 3. Resignation and Removal.
Any director may resign at any time upon written notice to the Corporation
at its principal place of business or to the Chief Executive Officer, President
or Secretary. Such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some other
event. Subject to the rights of the holders of any series of Preferred Stock
then outstanding, any director, or the entire Board of Directors, may be removed
from office at any time only for cause. A director may be removed for cause by
the holders of a majority of the shares of the Corporation then entitled to vote
at an election of a director and only after a reasonable notice and opportunity
to be heard before the stockholders.
Section 4. Regular Meetings.
Regular meetings of the Board of Directors shall be held at such place or
places, on such date or dates, and at such time or times as shall have been
established by the Board of Directors and publicized among all directors. A
written notice of each regular meeting shall not be required.
Section 5. Special Meetings.
Special meetings of the Board of Directors may be called by the Chairman of
the Board of Directors, if any, the Board of Directors or the President and
shall be held at such place, on such date, and at such time as they or he or she
shall fix. Notice of the place, date, and time of each such special meeting
shall be given to each director by whom it is not waived by mailing written
notice not less than three (3) days before the meeting or orally, by telegraph,
telex, cable or telecopy given not less than twenty-four (24) hours before the
meeting. Unless otherwise indicated in the notice thereof, any and all business
may be transacted at a special meeting.
Section 6. Quorum.
At any meeting of the Board of Directors, a majority of the total number of
members of the Board of Directors shall constitute a quorum for all purposes. If
a quorum shall fail to attend any meeting, a majority of those present may
adjourn the meeting to another place, date, or time, without further notice or
waiver thereof.
Section 7. Action by Consent.
Unless otherwise restricted by the Certificate of Incorporation or these
Bylaws, any action required or permitted to be taken at any meeting of the Board
of Directors or of any committee thereof may be taken without a meeting, if all
members of the Board or committee, as the case may be, consent thereto in
writing, and the writing or writings are filed with the minutes of proceedings
of the Board or committee.
Section 8. Participation in Meetings By Conference Telephone.
Members of the Board of Directors, or of any committee thereof, may
participate in a meeting of such Board or committee by means of conference
telephone or similar
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communications equipment by means of which all persons participating in the
meeting can hear each other and such participation shall constitute presence in
person at such meeting.
Section 9. Conduct of Business.
At any meeting of the Board of Directors, business shall be transacted in
such order and manner as the Board may from time to time determine, and all
matters shall be determined by the vote of a majority of the directors present,
except as otherwise provided herein or required by law.
Section 10. Powers.
The Board of Directors may, except as otherwise required by law, exercise
all such powers and do all such acts and things as may be exercised or done by
the Corporation, including, without limiting the generality of the foregoing,
the unqualified power:
(1) To declare dividends from time to time in accordance with law;
(2) To purchase or otherwise acquire any property, rights or
privileges on such terms as it shall determine;
(3) To authorize the creation, making and issuance, in such form as
it may determine, of written obligations of every kind,
negotiable or non-negotiable, secured or unsecured, to borrow
funds and guarantee obligations, and to do all things necessary
in connection therewith;
(4) To remove any officer of the Corporation with or without cause,
and from time to time to devolve the powers and duties of any
officer upon any other person for the time being;
(5) To confer upon any officer of the Corporation the power to
appoint, remove and suspend subordinate officers, employees and
agents;
(6) To adopt from time to time such stock, option, stock purchase,
bonus or other compensation plans for directors, officers,
employees and agents of the Corporation and its subsidiaries as
it may determine;
(7) To adopt from time to time such insurance, retirement, and other
benefit plans for directors, officers, employees and agents of
the Corporation and its subsidiaries as it may determine; and,
(8) To adopt from time to time regulations, not inconsistent with
these Bylaws, for the management of the Corporation's business
and affairs.
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Section 11. Compensation of Directors.
Directors, as such, may receive, pursuant to a resolution of the Board of
Directors, fixed fees and other compensation for their services as directors,
including, without limitation, their services as members of committees of the
Board of Directors.
ARTICLE III - COMMITTEES
Section 1. Committees of the Board of Directors.
The Board of Directors, by a vote of a majority of the Board of Directors,
may from time to time designate committees of the Board, with such lawfully
delegable powers and duties as it thereby confers, to serve at the pleasure of
the Board and shall, for those committees and any others provided for herein,
elect a director or directors to serve as the member or members, designating, if
it desires, other directors as alternate members who may replace any absent or
disqualified member at any meeting of the committee. Any such committee, to the
extent provided in the resolution of the Board of Directors, shall have and may
exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the Corporation, and may authorize the
seal of the Corporation to be affixed to all papers which may require it; but no
such committee shall have the power or authority in reference to amending the
Certificate of Incorporation, adopting an agreement of merger or consolidation,
recommending to the stockholders the sale, lease or exchange of all or
substantially all of the Corporation's property and assets, recommending to the
stockholders a dissolution of the Corporation or a revocation of a dissolution,
or amending the Bylaws of the Corporation. Any committee so designated may
exercise the power and authority of the Board of Directors to declare a
dividend, to authorize the issuance of stock or to adopt a certificate of
ownership and merger pursuant to Section 253 of the Delaware General Corporation
Law if the resolution which designates the committee or a supplemental
resolution of the Board of Directors shall so provide. In the absence or
disqualification of any member of any committee and any alternate member in his
or her place, the member or members of the committee present at the meeting and
not disqualified from voting, whether or not he or she or they constitute a
quorum, may by unanimous vote appoint another member of the Board of Directors
to act at the meeting in the place of the absent or disqualified member.
Section 2. Conduct of Business.
Each committee may determine the procedural rules for meeting and
conducting its business and shall act in accordance therewith, except as
otherwise provided herein or required by law. Adequate provision shall be made
for notice to members of all meetings; one-third (1/3) of the members of any
committee shall constitute a quorum unless the committee shall consist of one
(1) or two (2) members, in which event one (1) member shall constitute a quorum;
and all matters shall be determined by a majority vote of the members present.
Action may be taken by any committee without a meeting if all members thereof
consent thereto in writing, and the writing or writings are filed with the
minutes of the proceedings of such committee.
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ARTICLE IV - OFFICERS
Section 1. Enumeration.
The officers of the Corporation shall consist of a President, a Treasurer,
a Secretary and such other officers as the Board of Directors or the Chairman of
the Board may determine, including, but not limited to, a Chairman of the Board
of Directors, a Chief Executive Officer, and one or more Vice Presidents,
Assistant Treasurers and Assistant Secretaries.
Section 2. Election.
The Chairman of the Board, if any, the President, the Treasurer and the
Secretary shall be elected annually by the Board of Directors at their first
meeting following the annual meeting of the stockholders. The Board of Directors
or the Chairman of the Board, if any, may, from time to time, elect or appoint
such other officers as it or he or she may determine, including, but not limited
to, one or more Vice Presidents, Assistant Treasurers and Assistant Secretaries.
Section 3. Qualification.
The Chairman of the Board, if any, and any Vice Chairman appointed to act
in the absence of the Chairman, if any, shall be elected by and from the Board
of Directors, but no other officer need be a director. Two or more offices may
be held by any one person. If required by vote of the Board of Directors, an
officer shall give bond to the Corporation for the faithful performance of his
or her duties, in such form and amount and with such sureties as the Board of
Directors may determine. The premiums for such bonds shall be paid by the
Corporation.
Section 4. Tenure and Removal.
Each officer elected or appointed by the Board of Directors shall hold
office until the first meeting of the Board of Directors following the next
annual meeting of the stockholders and until his or her successor is elected or
appointed and qualified, or until he or she dies, resigns, is removed or becomes
disqualified, unless a shorter term is specified in the vote electing or
appointing said officer. Each officer appointed by the Chairman of the Board, if
any, shall hold office until his or her successor is elected or appointed and
qualified, or until he or she dies, resigns, is removed or becomes disqualified,
unless a shorter term is specified by any agreement or other instrument
appointing such officer. Any officer may resign by giving written notice of his
or her resignation to the Chairman of the Board, if any, the President, or the
Secretary, or to the Board of Directors at a meeting of the Board, and such
resignation shall become effective at the time specified therein. Any officer
elected or appointed by the Board of Directors may be removed from office with
or without cause by vote of a majority of the directors. Any officer appointed
by the Chairman of the Board, if any, may be removed with or without cause by
the Chairman of the Board.
Section 5. Chairman of the Board.
The Chairman of the Board, if any, shall preside at all meetings of the
Board of Directors and stockholders at which he or she is present and shall have
such authority and perform such duties as may be prescribed by these Bylaws or
from time to time be determined by the Board of
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Directors. The Chairman of the Board shall also have the power and authority to
determine the compensation and duties of all officers, employees and agents of
the Corporation and shall have the power and authority to sign all stock
certificates, contracts and other instruments of the Corporation which are
authorized.
Section 6. President.
Except for meetings at which the Chief Executive Officer or the Chairman of
the Board, if any, presides, the President shall, if present, preside at all
meetings of stockholders, and if a director, at all meetings of the Board of
Directors. The President shall, subject to the control and direction of the
Chief Executive Officer and the Board of Directors, have and perform such powers
and duties as may be prescribed by these Bylaws or from time to time be
determined by the Chief Executive Officer or the Board of Directors. The
President shall have power to sign all stock certificates, contracts and other
instruments of the Corporation which are authorized. In the absence of a Chief
Executive Officer, the President shall be the chief executive officer of the
Corporation and shall, subject to the direction of the Board of Directors, have
general supervision and control of its business and shall have general
supervision and direction of all of the officers, employees and agents of the
Corporation.
Section 7. Chief Executive Officer.
The Chief Executive Officer shall be the chief executive officer of the
Corporation and shall, subject to the direction of the Board of Directors, have
general supervision and control of its business. Unless otherwise provided by
resolution of the Board of Directors, in the absence of the Chairman of the
Board, if any, the Chief Executive Officer shall preside at all meetings of the
stockholders and, if a director, meetings of the Board of Directors. The Chief
Executive Officer shall have general supervision and direction of all of the
officers, employees and agents of the Corporation.
Section 8. Vice Presidents.
The Vice Presidents, if any, in the order of their election, or in such
other order as the Board of Directors may determine, shall have and perform the
powers and duties of the President (or such of the powers and duties as the
Board of Directors may determine) whenever the President is absent or unable to
act. The Vice Presidents, if any, shall also have such other powers and duties
as may from time to time be determined by the Board of Directors.
Section 9. Treasurer and Assistant Treasurers.
The Treasurer shall, subject to the control and direction of the Board of
Directors, have and perform such powers and duties as may be prescribed in these
Bylaws or be determined from time to time by the Board of Directors. All
property of the Corporation in the custody of the Treasurer shall be subject at
all times to the inspection and control of the Board of Directors. The Treasurer
shall have the responsibility for maintaining the financial records of the
Corporation. The Treasurer shall make such disbursements of the funds of the
Corporation as are authorized and shall render from time to time an account of
all such transactions and of the financial condition of the Corporation. Unless
otherwise voted by the Board of Directors, each Assistant Treasurer, if any,
shall have and perform the powers and duties of the Treasurer
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whenever the Treasurer is absent or unable to act, and may at any time exercise
such of the powers of the Treasurer, and such other powers and duties, as may
from time to time be determined by the Board of Directors.
Section 10. Secretary and Assistant Secretaries.
The Board of Directors shall appoint a Secretary and, in his or her
absence, an Assistant Secretary. The Secretary or, in his or her absence, any
Assistant Secretary, shall attend all meetings of the directors and shall record
all votes of the Board of Directors and minutes of the proceedings at such
meetings. The Secretary or, in his or her absence, any Assistant Secretary,
shall notify the directors of their meetings, and shall have and perform such
other powers and duties as may from time to time be determined by the Board of
Directors. If the Secretary or an Assistant Secretary is elected but is absent
from any meeting of directors, a temporary Secretary may be appointed by the
directors at the meeting
Section 11. Bond.
If required by the Board of Directors, any officer shall give the
Corporation a bond in such sum and with such surety or sureties and upon such
terms and conditions as shall be satisfactory to the Board of Directors,
including without limitation a bond for the faithful performance of the duties
of his office and for the restoration to the Corporation of all books, papers,
vouchers, money and other property of whatever kind in his or her possession or
under his control and belonging to the Corporation.
Section 12. Action with Respect to Securities of Other Corporations.
Unless otherwise directed by the Board of Directors, the President, the
Treasurer or any officer of the Corporation authorized by the President shall
have power to vote and otherwise act on behalf of the Corporation, in person or
by proxy, at any meeting of stockholders of or with respect to any action of
stockholders of any other corporation in which this Corporation may hold
securities and otherwise to exercise any and all rights and powers which this
Corporation may possess by reason of its ownership of securities in such other
corporation.
ARTICLE V - STOCK
Section 1. Certificates of Stock.
Each stockholder shall be entitled to a certificate signed by, or in the
name of the Corporation by the Chairman of the Board of Directors, or the
President or a Vice President, and by the Treasurer or an Assistant Treasurer,
or the Secretary or an Assistant Secretary, certifying the number of shares
owned by him, her or it. Any or all of the signatures on the certificate may be
by facsimile.
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Section 2. Transfers of Stock.
Transfers of stock shall be made only upon the transfer books of the
Corporation kept at an office of the Corporation or by transfer agents
designated to transfer shares of the stock of the Corporation. Except where a
certificate is issued in accordance with Section 4 of this Article of these
Bylaws, an outstanding certificate for the number of shares involved shall be
surrendered for cancellation before a new certificate is issued therefor.
Section 3. Record Date.
In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders, or to receive payment of
any dividend or other distribution or allotment of any rights or to exercise any
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board of Directors may fix a record
date, which record date shall not precede the date on which the resolution
fixing the record date is adopted and which record date shall not be more than
sixty (60) nor less than ten (10) days before the date of any meeting of
stockholders, nor more than sixty (60) days prior to the time for such other
action as hereinbefore described; provided, however, that if no record date is
fixed by the Board of Directors, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next preceding the day on which notice is given or,
if notice is waived, at the close of business on the day next preceding the day
on which the meeting is held, and, for determining stockholders entitled to
receive payment of any dividend or other distribution or allotment of rights or
to exercise any rights of change, conversion or exchange of stock or for any
other purpose, the record date shall be at the close of business on the day on
which the Board of Directors adopts a resolution relating thereto.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
Section 4. Lost, Stolen or Destroyed Certificates.
In the event of the loss, theft or destruction of any certificate of stock,
another may be issued in its place pursuant to such regulations as the Board of
Directors may establish concerning proof of such loss, theft or destruction and
concerning the giving of a satisfactory bond or bonds of indemnity.
Section 5. Regulations.
The issue, transfer, conversion and registration of certificates of stock
shall be governed by such other regulations as the Board of Directors may
establish.
Section 6. Interpretation.
The Board of Directors shall have the power to interpret all of the terms
and provisions of these Bylaws, which interpretation shall be conclusive.
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<PAGE> 14
ARTICLE VI - NOTICES
Section 1. Notices.
Except as otherwise specifically provided herein or required by law, all
notices required to be given to any stockholder, director, officer, employee or
agent shall be in writing and may in every instance be effectively given by hand
delivery to the recipient thereof, by depositing such notice in the mail,
postage paid, or by sending such notice by courier service, prepaid telegram or
mailgram, or telecopy, cable, or telex. Any such notice shall be addressed to
such stockholder, director, officer, employee or agent at his or her last known
address as the same appears on the books of the Corporation. The time when such
notice is received, if hand delivered, or dispatched, if delivered through the
mail or by courier, telegram, mailgram, telecopy, cable, or telex shall be the
time of the giving of the notice.
Section 2. Waiver of Notice.
A written waiver of any notice, signed by a stockholder, director, officer,
employee or agent, whether before or after the time of the event for which
notice is to be given, shall be deemed equivalent to the notice required to be
given to such stockholder, director, officer, employee or agent. Neither the
business nor the purpose of any meeting need be specified in such a waiver.
Attendance of a director or stockholder at a meeting without protesting prior
thereto or at its commencement the lack of notice shall also constitute a waiver
of notice by such director or stockholder.
ARTICLE VII -INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 1. Right to Indemnification.
Each person who was or is made a party or is threatened to be made a party
to or is otherwise involved (including, without limitation, as a witness) in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was a director or an officer
of the Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, or of a
partnership, joint venture, trust or other enterprise, including service with
respect to an employee benefit plan (hereinafter an "Indemnitee"), whether the
basis of such proceeding is alleged action in an official capacity as a
director, officer, employee or agent or in any other capacity while serving as a
director, officer, employee or agent, shall be indemnified and held harmless by
the Corporation to the fullest extent authorized by the Delaware General
Corporation Law, as the same exists or may hereafter be amended (but, in the
case of any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than such law permitted
the Corporation to provide prior to such amendment), against all expense,
liability and loss (including attorneys' fees, judgments, fines, ERISA excise
taxes or penalties and amounts paid in settlement) reasonably incurred or
suffered by such Indemnitee in connection therewith; provided, however, that,
except as provided in Section 3 of this Article with respect to proceedings to
enforce rights to indemnification or as otherwise required by law, the
Corporation shall not be required to indemnify or advance expenses to any such
Indemnitee in connection
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<PAGE> 15
with a proceeding (or part thereof) initiated by such Indemnitee unless such
proceeding (or part thereof) was authorized by the Board of Directors of the
Corporation.
Section 2. Right to Advancement of Expenses.
The right to indemnification conferred in Section 1 of this Article shall
include the right to be paid by the Corporation the expenses (including
attorney's fees) incurred in defending any such proceeding in advance of its
final disposition; provided, however, that, if the Delaware General Corporation
Law requires, an advancement of expenses incurred by an Indemnitee in his
capacity as a director or officer (and not in any other capacity in which
service was or is rendered by such Indemnitee, including, without limitation,
service to an employee benefit plan) shall be made only upon delivery to the
Corporation of an undertaking, by or on behalf of such Indemnitee, to repay all
amounts so advanced if it shall ultimately be determined by final judicial
decision from which there is no further right to appeal that such Indemnitee is
not entitled to be indemnified for such expenses under this Section 2 or
otherwise. The rights to indemnification and to the advancement of expenses
conferred in Sections 1 and 2 of this Article shall be contract rights and such
rights shall continue as to an Indemnitee who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the Indemnitee's
heirs, executors and administrators. Any repeal or modification of any of the
provisions of this Article shall not adversely affect any right or protection of
an Indemnitee existing at the time of such repeal or modification.
Section 3. Right of Indemnitees to Bring Suit.
If a claim under Section 1 or 2 of this Article is not paid in full by the
Corporation within sixty (60) days after a written claim has been received by
the Corporation, except in the case of a claim for an advancement of expenses,
in which case the applicable period shall be twenty (20) days, the Indemnitee
may at any time thereafter bring suit against the Corporation to recover the
unpaid amount of the claim. If successful in whole or in part in any such suit,
or in a suit brought by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the Indemnitee shall also be entitled
to be paid the expenses of prosecuting or defending such suit. In (i) any suit
brought by the Indemnitee to enforce a right to indemnification hereunder (but
not in a suit brought by the Indemnitee to enforce a right to an advancement of
expenses) it shall be a defense that, and (ii) in any suit brought by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking, the Corporation shall be entitled to recover such expenses upon a
final adjudication that, the Indemnitee has not met any applicable standard for
indemnification set forth in the Delaware General Corporation Law. Neither the
failure of the Corporation (including its Board of Directors, independent legal
counsel, or its stockholders) to have made a determination prior to the
commencement of such suit that indemnification of the Indemnitee is proper in
the circumstances because the Indemnitee has met the applicable standard of
conduct set forth in the Delaware General Corporation Law, nor an actual
determination by the Corporation (including its Board of Directors, independent
legal counsel, or its stockholders) that the Indemnitee has not met such
applicable standard of conduct, shall create a presumption that the Indemnitee
has not met the applicable standard of conduct or, in the case of such a suit
brought by the Indemnitee, be a defense to such suit. In any suit brought by the
Indemnitee to enforce a right to indemnification or to an advancement of
expenses hereunder, or brought by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking, the burden of
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<PAGE> 16
proving that the Indemnitee is not entitled to be indemnified, or to such
advancement of expenses, under this Article or otherwise shall be on the
Corporation.
Section 4. Non-Exclusivity of Rights.
The rights to indemnification and to the advancement of expenses conferred
in this Article shall not be exclusive of any other right which any person may
have or hereafter acquire under any statute, the Corporation's Certificate of
Incorporation as amended and restated from time to time, these Bylaws, any
agreement, any vote of stockholders or disinterested directors or otherwise.
Section 5. Insurance.
The Corporation may maintain insurance, at its expense, to protect itself
and any director, officer, employee or agent of the Corporation or another
corporation, partnership, joint venture, trust or other enterprise against any
expense, liability or loss, whether or not the Corporation would have the power
to indemnify such person against such expense, liability or loss under the
Delaware General Corporation Law.
Section 6. Indemnification of Employees and Agents of the Corporation.
The Corporation may, to the extent authorized from time to time by the
Board of Directors, grant rights to indemnification and to the advancement of
expenses to any employee or agent of the Corporation to the fullest extent of
the provisions of this Article with respect to the indemnification and
advancement of expenses of directors and officers of the Corporation.
ARTICLE VIII - CERTAIN TRANSACTIONS
Section 1. Transactions with Interested Parties.
No contract or transaction between the Corporation and one or more of its
directors or officers, or between the Corporation and any other corporation,
partnership, association, or other organization in which one or more of its
directors or officers are directors or officers, or have a financial interest,
shall be void or voidable solely for this reason, or solely because the director
or officer is present at or participates in the meeting of the Board or
committee thereof which authorizes the contract or transaction or solely because
the votes of such director or officer are counted for such purpose, if:
(a) The material facts as to his or her relationship or interest and
as to the contract or transaction are disclosed or are known to the Board
of Directors or the committee, and the Board or committee in good faith
authorizes the contract or transaction by the affirmative votes of a
majority of the disinterested directors, even though the disinterested
directors be less than a quorum; or
(b) The material facts as to his or her relationship or interest and
as to the contract or transaction are disclosed or are known to the
stockholders entitled to vote
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<PAGE> 17
thereon, and the contract or transaction is specifically approved in good
faith by vote of the stockholders; or
(c) The contract or transaction is fair as to the Corporation as of
the time it is authorized, approved or ratified, by the Board of Directors,
a committee thereof, or the stockholders.
Section 2. Quorum.
Common or interested directors may be counted in determining the presence
of a quorum at a meeting of the Board of Directors or of a committee which
authorizes the contract or transaction.
ARTICLE IX - MISCELLANEOUS
Section 1. Facsimile Signatures.
In addition to the provisions for use of facsimile signatures elsewhere
specifically authorized in these Bylaws, facsimile signatures of any officer or
officers of the Corporation may be used whenever and as authorized by the Board
of Directors or a committee thereof.
Section 2. Corporate Seal.
The Board of Directors may provide a suitable seal, containing the name of
the Corporation, which seal shall be in the charge of the Secretary. If and when
so directed by the Board of Directors or a committee thereof, duplicates of the
seal may be kept and used by the Treasurer or by an Assistant Secretary or
Assistant Treasurer.
Section 3. Reliance upon Books, Reports and Records.
Each director, each member of any committee designated by the Board of
Directors, and each officer of the Corporation shall, in the performance of his
or her duties, be fully protected in relying in good faith upon the books of
account or other records of the Corporation and upon such information, opinions,
reports or statements presented to the Corporation by any of its officers or
employees, or committees of the Board of Directors so designated, or by any
other person as to matters which such director or committee member reasonably
believes are within such other person's professional or expert competence and
who has been selected with reasonable care by or on behalf of the Corporation.
Section 4. Fiscal Year.
Except as otherwise determined by the Board of Directors from time to time,
the fiscal year of the Corporation shall end on the last day of December of each
year.
Section 5. Time Periods.
In applying any provision of these Bylaws which requires that an act be
done or not be done a specified number of days prior to an event or that an act
be done during a period of a
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<PAGE> 18
specified number of days prior to an event, calendar days shall be used, the day
of the doing of the act shall be excluded, and the day of the event shall be
included.
Section 6. Pronouns.
Whenever the context may require, any pronouns used in these Bylaws shall
include the corresponding masculine, feminine or neuter forms.
ARTICLE X - AMENDMENTS
These Bylaws may be amended or repealed by the affirmative vote of a
majority of the whole Board of Directors or by the stockholders by the
affirmative vote of seventy percent (70%) of the outstanding voting power of the
then-outstanding shares of capital stock of the Corporation, entitled to vote
generally in the election of directors, at any meeting at which a proposal to
amend or repeal these Bylaws is properly presented.
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<PAGE> 1
EXHIBIT 10.10
ARTIFICIAL LIFE, INC.
1998 EQUITY INCENTIVE PLAN
1. PURPOSE
The purpose of the Artificial Life, Inc. 1998 Equity Incentive Plan
(the "Plan") is to attract and retain key employees, directors, advisers and
consultants of the Company and its Affiliates, to provide an incentive for them
to achieve long-range performance goals, and to enable them to participate in
the long-term growth of the Company by the granting of awards ("Awards") with
respect to the Company's Common Stock. Certain capitalized terms used herein are
defined in section 7 below.
2. ADMINISTRATION
The Plan shall be administered by the Committee. The Committee shall
select the Participants to receive Awards and shall determine the terms and
conditions of all Awards. The Committee shall have authority to adopt, alter and
repeal such administrative rules, guidelines and practices governing the
operation of the Plan as it shall from time to time consider advisable, and to
interpret the provisions of the Plan. The Committee's decisions shall be final
and binding. To the extent permitted by applicable law, the Committee may
delegate to one or more executive officers of the Company the power to make
Awards to Participants who are not Reporting Persons or Covered Employees and
all determinations under the Plan with respect thereto, provided that the
Committee shall fix the maximum amount of such Awards for all such Participants
and a maximum for any one Participant.
3. ELIGIBILITY
All employees, directors, advisers and consultants of the Company or
any Affiliate capable of contributing significantly to the successful
performance of the Company, other than a person who has irrevocably elected not
to be eligible, are eligible to be Participants in the Plan. However, Incentive
Stock Options may be granted only to persons eligible to receive such Stock
Options under the Code.
4. STOCK AVAILABLE FOR AWARDS
(a) AMOUNT. Subject to adjustment under subsection (b), Awards may
be made under the Plan for up to 1,200,000 shares of Common Stock in the
aggregate. If any Award expires or is terminated unexercised or is forfeited or
settled in a manner that results in fewer shares outstanding than were awarded,
the shares subject to such Award, to the extent of such expiration, termination,
forfeiture or decrease, shall again be available for award under the Plan.
Common Stock issued through the assumption or substitution of outstanding grants
from an acquired company shall not reduce the shares available for Awards under
the Plan. Shares issued under the Plan may consist in whole or in part of
authorized but unissued shares or treasury shares.
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<PAGE> 2
(b) ADJUSTMENT. In the event that the Committee determines that any
stock dividend, extraordinary cash dividend, recapitalization, reorganization,
merger, consolidation, split-up, spin-off, combination, exchange of shares or
other transaction affects the Common Stock such that an adjustment is required
in order to preserve the benefits intended to be provided by the Plan, then the
Committee (subject in the case of Incentive Stock Options to any limitation
required under the Code) shall equitably adjust any or all of (i) the number and
kind of shares for which Awards may be made under the Plan, (ii) the number and
kind of shares subject to outstanding Awards and (iii) the exercise price with
respect to any of the foregoing, provided that the number of shares subject to
any Award shall always be a whole number, and if considered appropriate, the
Committee may make provision for a cash payment with respect to all or part of
an outstanding Award instead of or in addition to any such adjustment.
(c) LIMIT ON INDIVIDUAL GRANTS. The maximum number of shares of
Common Stock subject to Awards that may be granted to any Participant in the
aggregate in any calendar year shall not exceed 300,000 shares, subject to
adjustment under subsection (b) above.
5. TYPES OF AWARDS.
(a) STOCK GRANTS. The Committee may make awards of shares of Common
Stock ("Stock Grants") upon such terms and conditions as the Committee
determines. Stock Grants may include without limitation restricted stock,
performance shares, performance-accelerated restricted stock and bonus stock.
Stock Grants may be issued for no cash consideration, such minimum consideration
as may be required by applicable law or such other consideration as the
Committee may determine.
(b) GRANT OF STOCK OPTIONS. Subject to the provisions of the Plan,
the Committee may grant options ("Stock Options") to purchase shares of Common
Stock (i) complying with the requirements of Section 422 of the Code or any
successor provision and any regulations thereunder ("Incentive Stock Options")
and (ii) not intended to comply with such requirements ("Nonstatutory Stock
Options"). The Committee shall determine the number of shares subject to each
Stock Option and all other applicable terms and conditions. No Incentive Stock
Option may be granted hereunder more than ten years after the effective date of
the Plan.
(c) STOCK EQUIVALENTS. The Committee may grant rights to receive
payment from the Company based in whole or in part on the value of the Common
Stock ("Stock Equivalents") upon such terms and conditions as the Committee
determines. Stock Equivalents may include without limitation phantom stock,
performance units, dividend equivalents and stock appreciation rights ("SARs").
SARs granted in tandem with a Stock Option will terminate to the extent that the
related Stock Option is exercised, and the related Stock Option will terminate
to the extent that the tandem SARs are exercised. The Committee will determine
at the time of grant or thereafter whether Stock Equivalents are to be settled
in cash, Common Stock or other securities of the Company, other Awards or other
property.
(d) TERMS AND CONDITIONS. Each Award shall be exercisable at such
times and subject to such terms and conditions as the Committee may specify in
the applicable grant or thereafter, except that the exercise price for each
Stock Option or SAR shall be established by the Committee on the date of grant.
The Committee may impose such conditions with respect to the
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<PAGE> 3
exercise of Awards, including conditions relating to applicable federal or state
securities laws, as it considers necessary or advisable.
(e) PAYMENT. No shares shall be delivered pursuant to any exercise
of any Stock Option and no SAR may be exercised until payment in full of the
exercise price therefor is received by the Company. Such payment may be made in
whole or in part in cash or, to the extent permitted by the Committee at or
after the grant of the Stock Option or SAR, by delivery of a note or other
commitment satisfactory to the Committee or shares of Common Stock owned by the
Participant or by retaining shares otherwise issuable pursuant to the Stock
Option or cash or other property otherwise issuable pursuant to the SAR, in each
case valued at their Fair Market Value on the date of delivery or retention, or
such other lawful consideration, including without limitation a payment
commitment of a financial or brokerage institution, as the Committee may
determine.
6. GENERAL PROVISIONS
(a) DOCUMENTATION. Each Award under the Plan shall be evidenced by a
writing delivered to the Participant specifying the terms and conditions thereof
and containing such other terms and conditions not inconsistent with the
provisions of the Plan as the Committee considers necessary or advisable to
achieve the purposes of the Plan or to comply with applicable tax and regulatory
laws and accounting principles. Such terms and conditions may include, without
limitation, performance criteria, vesting requirements, restrictions on transfer
and payment rules. The Committee may establish terms and conditions at the time
the Award is granted or may provide that such terms and conditions will be
determined at any time thereafter.
(b) COMMITTEE DISCRETION. Each type of Award may be made alone, in
addition to or in relation to any other Award. SARs granted in tandem with a
Stock Option will terminate to the extent that the related Stock Option is
exercised, and the related Stock Option will terminate to the extent that the
tandem SARs are exercised. The terms of each type of Award need not be
identical, and the Committee need not treat Participants uniformly. Except as
otherwise provided by the Plan or a particular Award, any determination with
respect to an Award may be made by the Committee at the time of grant or at any
time thereafter.
(c) DIVIDENDS AND CASH AWARDS. In the discretion of the Committee,
any Award under the Plan may provide the Participant with (i) dividends or
dividend equivalents payable (in cash or in the form of Awards under the Plan)
currently or deferred with or without interest and (ii) cash payments in lieu of
or in addition to an Award.
(d) TERMINATION OF EMPLOYMENT. The Committee shall determine the
effect on an Award of the disability, death, retirement or other termination of
employment of a Participant and the extent to which, and the period during
which, the Participant's legal representative, guardian or Designated
Beneficiary may receive payment of an Award or exercise rights thereunder.
(e) CHANGE IN CONTROL. In order to preserve a Participant's rights
under an Award in the event of a change in control of the Company (as defined by
the Committee), the Committee in its discretion may, at the time an Award is
made or at any time thereafter, take one or more of
3
<PAGE> 4
the following actions: (i) provide for the acceleration of any time period
relating to the exercise or payment of the Award, (ii) provide for payment to
the Participant of cash or other property with a Fair Market Value equal to the
amount that would have been received upon the exercise or payment of the Award
had the Award been exercised or paid upon the change in control, (iii) adjust
the terms of the Award in a manner determined by the Committee to reflect the
change in control, (iv) cause the Award to be assumed, or new rights substituted
therefor, by another entity, or (v) make such other provision as the Committee
may consider equitable to Participants and in the best interests of the Company.
(f) TRANSFERABILITY. In the discretion of the Committee, any Award
may be made transferable upon such terms and conditions and to such extent as
the Committee determines, provided that Incentive Stock Options may be
transferable only to the extent permitted by the Code. The Committee may in its
discretion waive any restriction on transferability.
(g) LOANS. The Committee may authorize the making of loans or cash
payments to Participants in connection with the grant or exercise of any Award
under the Plan, which loans may be secured by any security, including Common
Stock, underlying or related to such Award (provided that the loan shall not
exceed the Fair Market Value of the security subject to such Award), and which
may be forgiven upon such terms and conditions as the Committee may establish at
the time of such loan or at any time thereafter.
(h) WITHHOLDING TAXES. The Participant shall pay to the Company, or
make provision satisfactory to the Committee for payment of, any taxes required
by law to be withheld in respect of Awards under the Plan no later than the date
of the event creating the tax liability. The Company and its Affiliates may, to
the extent permitted by law, deduct any such tax obligations from any payment of
any kind otherwise due to the Participant. In the Committee's discretion, such
tax obligations may be paid in whole or in part in shares of Common Stock,
including shares retained from the Award creating the tax obligation, valued at
their Fair Market Value on the date of delivery.
(i) FOREIGN NATIONALS. Awards may be made to Participants who are
foreign nationals or employed outside the United States on such terms and
conditions different from those specified in the Plan as the Committee considers
necessary or advisable to achieve the purposes of the Plan or to comply with
applicable laws, including without limitation foreign tax laws.
(j) AMENDMENT OF AWARDS. The Committee may amend, modify or
terminate any outstanding Award, including substituting therefor another Award
of the same or a different type, changing the date of exercise or realization
and converting an Incentive Stock Option to a Nonstatutory Stock Option,
provided that the Participant's consent to such action shall be required unless
the Committee determines that the action, taking into account any related
action, would not materially and adversely affect the Participant.
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<PAGE> 5
7. CERTAIN DEFINITIONS
"Affiliate" means any business entity in which the Company owns
directly or indirectly 50% or more of the total voting power or has a
significant financial interest as determined by the Committee.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended from time
to time, or any successor law.
"Committee" means the committee of the Board to which the Board has
delegated power to act under or pursuant to the provisions of the Plan. If the
Board has not delegated such power to act under or pursuant to the provisions of
the Plan to a committee, Committee means the Board.
"Common Stock" or "Stock" means the Common Stock, $0.01 par value, of
the Company.
"Company" means Artificial Life, Inc., a Delaware corporation.
"Covered Employee" means a "covered employee" within the meaning of
Section 162(m) of the Code.
"Designated Beneficiary" means the beneficiary designated by a
Participant, in a manner determined by the Committee, to receive amounts due or
exercise rights of the Participant in the event of the Participant's death. In
the absence of an effective designation by a Participant, "Designated
Beneficiary" means the Participant's estate.
"Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, or any successor law.
"Fair Market Value" means, with respect to Common Stock or any other
property, the fair market value of such property as determined by the Committee
in good faith or in the manner established by the Committee from time to time.
"Participant" means a person selected by the Committee to receive an
Award under the Plan.
"Reporting Person" means a person subject to Section 16 of the
Exchange Act.
5
<PAGE> 6
8. MISCELLANEOUS
(a) NO RIGHT TO EMPLOYMENT. No person shall have any claim or right
to be granted an Award. Neither the Plan nor any Award hereunder shall be deemed
to give any employee the right to continued employment or to limit the right of
the Company to discharge any employee at any time.
(b) NO RIGHTS AS STOCKHOLDER. Subject to the provisions of the
applicable Award, no Participant or Designated Beneficiary shall have any rights
as a stockholder with respect to any shares of Common Stock to be distributed
under the Plan until he or she becomes the holder thereof. A Participant to whom
Common Stock is awarded shall be considered the holder of such Common Stock at
the time of the Award, except as otherwise provided in such Award.
(c) EFFECTIVE DATE. Subject to the approval of the stockholders of
the Company, the Plan shall be effective as of April 1, 1998, or as soon
thereafter as is consistent with applicable law.
(d) AMENDMENT OF PLAN. The Board may amend, suspend or terminate the
Plan or any portion thereof at any time, subject to such stockholder approval as
the Board determines to be necessary or advisable to comply with any tax or
regulatory requirement.
(e) GOVERNING LAW. The provisions of the Plan shall be governed by
and interpreted in accordance with the laws of State of Delaware.
This Plan was approved by the Board of Directors on April 1, 1998.
This Plan was approved by the stockholders on April 2, 1998.
6
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use in this First Amendment to the Registration Statement on
Form S-1 and Prospectus of Artificial Life, Inc. of our report dated September
10, 1998, except for Note 2 as to which the date is September 22, 1998, Notes 7
and 8 as to which the date is September 23, 1998, and Note 10 as to which the
date is October 16, 1998, on the balance sheets of Artificial Life, Inc. as of
December 31, 1997 and 1996, and the related statements of operations, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1997 and to the use of our name and the statements
with respect to us, as appearing under the heading "Experts" in the Prospectus.
/s/ Wolf & Company, P.C.
Wolf & Company, P.C.
Boston, Massachusetts
November 3, 1998
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